Identify all costs that change with production or sales volume

List each variable cost item separately

Determine the cost per unit for each variable cost item

Multiply the cost per unit by the number of units produced or sold

Add all variable cost amounts together

Use the formula: Total Variable Cost = Variable Cost per Unit × Number of Units

Use the formula: Variable Cost per Unit = Total Variable Costs ÷ Number of Units

Include costs such as direct materials, direct labor, packaging, shipping, and sales commissions if they vary with output

Exclude fixed costs such as rent, salaries, and insurance

Recalculate whenever production volume changes