Total Variable Costs (TVC) are business expenses that change directly based on the level of output produced. These costs rise when production increases and fall when production decreases.
Common examples include:
- Raw materials and components
- Direct labour wages
- Energy and fuel costs
- Packaging and distribution costs
- Sales commissions
- Temporary staff wages
Key characteristics:
- TVC is zero when production output is zero.
- TVC initially may rise at a slower rate due to production efficiency.
- Eventually, TVC rises at a faster rate due to diminishing returns.
Relationship with Total Cost (TC):
The formula is TC = TFC + TVC (Total Fixed Costs + Total Variable Costs). Because of this, the TC curve and the TVC curve always maintain the same slope.
Business Importance:
TVC helps a firm decide if it should continue operating in the short run. If Total Revenue (TR) is greater than TVC, the firm should continue producing because it at least covers its variable costs and contributes to paying off fixed costs.