All costs of the enterprise are divided into variables and fixed. Their main difference is that some change with increasing production volume, while others do not. However, fixed and variable costs include costs related to the production and its implementation. Upon termination of production activities, part of the cost disappears and becomes equal to zero. Consider what variable costs include. An example of the costs will also be given in the article.
Cost structure
Variable costs include:
- Selling expenses (interest on sales to sales managers and other remuneration, as well as% paid to outsourcing companies).
- Cost of goods released.
- Salary of working personnel (part of the salary, which depends on the standards implemented).
- The cost of fuel, raw materials, materials, electricity and other resources involved in production activities.
Variable costs also include some taxes: VAT, excise taxes, deductions under the simplified tax system, the unified social tax with bonuses.
Purpose of calculation
Behind each coefficient, indicator or concept, it is necessary to see their economic meaning. If we talk about the goals of the enterprise, then, in general, there are two of them: reducing costs or increasing income. When summarizing these concepts arises the profitability (profitability) of the company. The higher this indicator, the more stable the financial position of the company will be, there will be more opportunities to attract additional borrowed funds, to expand technical and production capacities. In this case, the enterprise can increase its own value in the market and strengthen investment attractiveness. The separation of costs of the enterprise is used in management accounting. Company managers need to know what variable costs include. There are no lines on which this group of expenses is reflected in the financial statements. Determining the magnitude of these costs in the overall structure allows us to analyze the activities of the company. Management, knowing that variable costs include, on the balance of expenses and income, gets the opportunity to consider different management strategies to increase the company's profitability.
Production and sales volume
To better understand what variable costs include, you should consider their separation depending on certain characteristics. In terms of production and sales distinguish:
- Proportional expenses. When calculating, elasticity coefficient 1 is used. Variable costs are increased in direct proportion to the increase in production volume. For example, the latter grew by 30%, respectively, costs will increase by the same amount.
- Progressive costs. The coefficient is> 1. Variable costs are highly sensitive to changes in the volume of output of goods. With its increase, the costs will be relatively larger. For example, the volume grew by 30%, and the costs - by 50%.
- Depressive expenses. The coefficient for them is <1. In the case of an increase in production volume, costs are reduced. This phenomenon is referred to as the “economies of scale” or “mass production effects”. For example, the volume of output increased by 30%, and expenses - only 15%.
How to reduce costs?
One of the options for reducing variable costs is the use of the "economies of scale". It appears with an increase in production volume and the transition from serial to mass production. The graph of the "economies of scale" shows that with an increase in output, a certain point is reached. In it, the relationship between the magnitude of costs and production volume becomes non-linear. At the same time, the rate at which the change in variable costs occurs is lower than the rate of growth of output / sale of goods. The reasons for the appearance of such an effect include:
- Reduced management costs.
- Application of scientific developments in the improvement of technology.
- The narrowing of product specialization. When focusing the production complex on the implementation of a number of specific tasks, the quality of work increases and the number of defects decreases.
- Issue of goods similar in the technological chain, additional loading of production capacities.
Static indicator
On this basis, expenses are divided into:
- Are common.
- Medium.
General variable costs include all expenses related to this category for the entire product range. The average cost includes 1 unit. product or product group.
Financial Accounting
Carrying out accounting, allocate:
- Direct costs. Such variable costs include costs that can be attributed to the cost of goods. These include expenses on materials, energy, raw materials, salaries, fuel and so on.
- Indirect costs. They depend on the production volume, so their contribution to the cost is difficult to assess. Such a situation, for example, occurs during the separation of milk during the manufacturing process into cream and low-fat product.
Process attitude
According to this criterion, variable costs of the production and non-production type are distinguished. The first relate to the process of production directly. Such variable costs include the costs of materials, raw materials, energy, fuel resources, wages for workers, and so on. Non-manufacturing costs not directly related to output. These include, for example, transportation costs, commissions for agents, and other administrative and commercial expenses.
Payment
The formula is as follows:
- Variable costs = Costs for raw materials + materials + fuel + electricity + premium to salary +% of sales.
Also, the indicator can be calculated as follows:
- Variable costs = gross (margin) profit - fixed costs.
Break even
Consider the role of variable costs in determining it. Break-even point directly depends on these costs. When a company reaches a certain production volume, a moment of equilibrium sets in. At this point, the amount of losses and profits coincides. Net income in this case is 0, and marginal - to constant costs. This point shows the minimum critical production level at which the enterprise is considered profitable. The company's task is to create a security zone and create a level of production and sales of products that would ensure maximum remoteness from the breakeven point. The further the company is from this point, the higher its financial stability, profitability, and competitiveness. With increasing variable costs, this point shifts.
Important point
The model considered above usually operates with linear relationships between production volume and profit / expense. In practice, these dependencies are often non-linear. This situation is due to the fact that a number of factors affect the size of output. These include:
- Seasonality of demand.
- Applied technology.
- The activities of competitors.
- Taxes.
- Macroeconomic indicators.
- "The effect of scale."
- Subsidies and stuff.
To ensure the accuracy of the model, it must be applied in the short term with respect to goods with steady demand.