Cost Function Calculator

Welcome to our cost function calculator! When you run a workshop, small atelier, or any manufacturing business, you know very well how quickly spending gets out of hand. In the morning, you buy screws; in the afternoon, you pay the electricity bill; and at the end of the month, you ask yourself: Did I actually make any money on this order?

To avoid guessing your selling price, this simple cost function calculator helps you see things clearly. In this article, you will learn:

• What the cost function equation is;
• How to apply the cost function formula; and
• How to use our cost function calculator.

So, practically speaking, what is a cost function?

Basically, a cost function is a simple formula that tells you how much total cash flows out as your production volume increases or decreases. If you know your shop’s cost function, you avoid the classic mistake of selling an item for less than it costs you to make.

In business, we usually watch these main types of cost functions:

• Linear cost function: The standard line where we suppose each extra piece costs exactly the same to make.
• Average cost function: This is your total spending divided by your quantity, so you see your real cost for one single piece.
• Marginal cost function: How much money you need to add if you decide to make just one more unit. We have a dedicated marginal cost calculator if this is what you need to know.
• Total cost function: The whole bill combined, with your baseline rent plus all your workshop materials.

The first mode of the calculator uses the standard cost function formula:

In this basic cost function equation:

• $\text{Fixed cost}$ is what you pay, even if you close the shop for holidays (e.g., rent, insurance, admin bills);
• $\text{Variable cost per unit}$ is what you spend on raw wood, metal, plastic, or labor for one item; and
• $\text{Quantity}$ is simply how many pieces you produce.

To find your real unit expense, the tool uses the average cost function:

And if you don’t know your unit rate because invoices are messy, you can take two past invoices and find it like this (this is the second mode of our cost function calculator):

Where $\rm Total\ cost\ 1$ is the total cost of quantity 1, etc.

To use our cost function calculator, follow these steps:

1. First, select the mode of the calculator:
   • Use fixed and variable costs if you already know your rates; or
   • Find cost function from two point costs, if you want to calculate from two old invoices.
2. If you chose the first mode, enter your:
   • Fixed cost;
   • Variable cost per unit; and
   • Planned Quantity of items.
3. If you chose the second mode, enter:
   • Quantity 1;
   • Total cost of quantity 1; then
   • Quantity 2;
   • Total cost of quantity 2; and finally
   • Quantity evaluated.
4. That’s it! Check the summary table that just appeared below to see your cost function equation, Total variable cost, Total cost, and Average cost per unit.

Let’s say you run a furniture workshop. Each month, you must pay $1,500 for rent and machines (Fixed cost). Then, to make one wooden chair, you need $15 of wood, varnish, and work hours (Variable cost per unit).

If a client orders 750 chairs, then you get:

• Total variable cost:
  750 × $15 = $11,250
• Total cost:
  $1,500 + $11,250 = $12,750
• Average cost per unit:
  $12,750 / 750 = $17

You might also find our break-even calculator useful for working out how many units you need to sell to break even.