What is the cost equation for total cost?

The cost equation for total cost identifies how the total expenses of a business are broken down. It is founded on the concept that total cost comprises two main components: fixed costs and variable costs.

Fixed costs remain constant regardless of the level of production or sales; they do not change with the volume of output, such as rent or salaries of permanent staff. On the other hand, variable costs fluctuate directly with the level of production, such as costs for raw materials or hourly wages.

By adding total variable cost to total fixed cost, you obtain the overall total cost incurred by the business. This relationship is fundamental in cost accounting and financial analysis, allowing businesses to understand their expenditure structure and make informed decisions regarding pricing, budgeting, and financial forecasting. Therefore, the equation correctly reflects this essential relationship between fixed and variable costs in determining total costs.