Each enterprise, regardless of its size, in the course of economic and financial activities uses certain resources: labor, material, financial. These consumed resources are the cost of production. They are divided into fixed costs and variables. Without them, it is impossible to carry out economic activities and make a profit. The division into variables and fixed costs allows you to correctly and efficiently make the most optimal management decisions, which helps to increase the profitability of the enterprise.
Fixed costs are all types of resources aimed at production and independent of its volume. They also do not depend on the number of services provided or goods sold. These costs are almost always the same throughout the year. Even if the company temporarily stops production or stops providing services, these costs will not stop. You can distinguish such fixed costs inherent in almost any enterprise:
- salary of permanent employees of the enterprise (salaries);
- deductions for social insurance;
- rent, leasing;
- tax deductions on property of the enterprise;
- payment for services of various organizations (communications, security, advertising);
- depreciation deductions calculated using the straight-line method.
Such expenses will always exist while the company carries out its business and financial activities. They exist, regardless of whether it receives income or not.
Variable costs - the costs of the enterprise, which vary in proportion to the volume of manufactured commodity products. They are directly related to production volumes. The main items of variable costs include:
- materials and raw materials necessary for production;
- piecework salary (at tariff rates), interest on sales agents;
- the cost of commercial products purchased from other enterprises for resale.
The main point of variable costs is that when an enterprise has an income, it may occur. Of its income, the enterprise spends part of the money on the purchase of raw materials, materials, and goods. At the same time, the money spent is transformed into liquid assets in stock. The company pays interest on remuneration to agents only from the income received.
This separation of fixed costs and variables is necessary for full business management. It is used to calculate the breakeven point of the enterprise. The lower the fixed costs, the lower it is. The reduction in the share of such costs sharply reduces the entrepreneurial risk.
The separation of costs into fixed and variable is widely used in the theory of microeconomics. It is also used in calculating the cost of production, to determine the specific weight of specific types of expenses, since the company benefits from a reduction in fixed costs. The growth in production reduces part of the fixed costs included in the unit cost of production, thereby increasing the profitability of production. This profit growth occurs due to the so-called “economies of scale”, that is, the more commodity products are produced, the lower their cost.
In practice, the concept of fixed costs is also often used. They represent the kind of costs that are present during downtime, but their value can be changed depending on the time period chosen by the enterprise. This type of costs intersects with indirect or overhead costs that accompany the main production, but are not directly related to it.