Fixed and variable costs of the company: what is it. Variable Costs What is an Example of Fixed Costs

Costs are those costs incurred by a firm to create a service or product. As a result of adding up all the costs, the cost of the goods is obtained, that is, the price of the goods is formed below which it is unprofitable to sell products on the market.

Fixed and variable costs of production

When analyzing costs, one can distinguish their different classification depending on the method of consideration. For example, fixed and variable costs of production. The first type of costs includes costs that are incurred at any stage of production and in any case, regardless of the volume of products produced. Even if the company has temporarily suspended production, fixed costs must be incurred. Fixed production costs include: rent for premises, depreciation, administrative and management costs, maintenance of equipment and security of the premises, heating and electricity costs, and more. If the company has received a loan, then the payment of interest is also a fixed cost.

Fixed costs of production are associated with the operation of the company, regardless of the quantity of goods produced. The ratio of the volume of manufactured goods to the volume of fixed costs is called average fixed costs. Average fixed costs show the cost per unit of output. As we said above, the amount of fixed costs does not depend on the quantity of goods produced, so average fixed costs decrease as the quantity of goods increases. As production increases, costs are spread over more products. Often in practice, fixed costs are called overhead costs.

Variable production costs include the cost of purchasing raw materials, energy costs, transport, fuel and lubricants, wages of production workers, etc. Variable production costs depend on the quantity of output and on the volume of production.

The combination of fixed (FC) and variable (VC) costs is called total costs (TC), which form the cost of production. They are calculated by the formula: TC = FC + VC. As a general rule, costs increase as production expands.

Unit costs can be average fixed (AFC), average variable (AVC) or average total (ATC). Calculated as follows:

1. AFC = fixed costs / volume of goods produced

2. AVC = Variable Costs / Goods Output

3. ATC \u003d total costs (or average fixed + average variables) / volume of goods produced

At the initial stages of production, the maximum costs, as the volumes increase, the average costs decrease, reach the minimum level, and then begin to grow.

If it is required to determine the amount of costs required to produce an additional unit of output, then marginal production costs are calculated, which show the costs of increasing production by the last unit of output.

Fixed Costs of Production: Examples

Fixed costs are those costs that remain unchanged regardless of the volume of products produced, even when these costs are idle. When summing up fixed and variable costs, the total costs are obtained, which form the cost of manufactured products.

Examples of Fixed Costs:

• Rental payments.
• Property taxes.
• Salary of office staff and others.

But fixed costs are such only for short-term analysis, since over a long period, costs can change due to an increase or decrease in production, changes in taxes and rents, and so on.

We cited the classification of production costs. We have pointed out that the costs in relation to the volume of production are divided into fixed and variable. We will tell you more about them in our material.

What costs depend on the volume of production

Organizational costs that increase as production increases are called variable costs. The simplest and most understandable version of variable costs is proportional costs. Proportional costs are costs that are proportional to the volume of production.

Let's take an example. For the manufacture of 1 pc. product A requires 5 kg of base material. The cost of 1 kg. material - 100 rubles. Accordingly, in the production of 800 pcs. product A, the main material in the amount of 400,000 rubles will be consumed. (800 pieces * 5 kg / piece * 100 rubles / kg).

If the production volume doubles to 1,600 pieces, the cost of materials will also double and amount to 800,000 rubles (1,600 pieces * 5 kg/piece * 100 rubles/kg).

Keep in mind that certain conditions are assumed when calculating proportional costs. For example, in our example, it is assumed that with an increase in the volume of purchases of materials, its price per 1 kg will not change.

But in practice, as a rule, the so-called “scale effect” comes into force. Therefore, variable costs are more often still conditionally variable costs.

fixed costs

Costs that do not depend on the volume of production are called fixed. This means that regardless of the volume of production, the organization always incurs fixed costs. And given that the total cost of the organization is determined by the addition of fixed and variable costs, we can say that the total cost at zero volume of production is equal to the value of fixed costs. After all, if a manufacturing company does not produce anything in the reporting period, it will still have to pay the rent of premises and pay salaries to employees of management personnel.

Unit fixed costs

In the analysis of fixed costs of interest are specific fixed costs, which are defined as the amount of fixed costs per unit of output. Specific fixed costs decrease with the growth of production volume. Let's show this with an example.

The amount of fixed costs for the reporting period is 100,000 rubles, and the volume of output is 10,000 pieces. Therefore, the fixed costs per unit of production are 10 rubles (100,000 rubles / 10,000 pieces). If in the next reporting period the volume of output increases to 12,000 units, the unit fixed costs will decrease to 8.33 rubles (100,000 rubles / 12,000 units).

However, fixed costs in practice are also conditionally fixed in nature. This means that at a given level of production, costs that are defined as fixed costs can either increase or decrease. For example, the rental of a warehouse space, which is accounted for as a fixed expense, will also increase with a significant increase in sales, since the old warehouse will not be able to accommodate the volume of production and the company will have to rent another room.

Marginal cost and output

Marginal cost is the cost associated with producing an additional unit of output. This means that marginal cost arises as output increases. However, it is not always easy to calculate their value, because their size is not only variable costs per unit of output, but also part of the semi-fixed costs that may additionally arise with an increase in production volume.

We cited the classification of costs according to various criteria in. Read more about fixed and variable production costs in this material.

Variable production costs

Variable production costs depend on the volume of output: they change as the quantity of output increases or decreases. Variable production costs include the cost of materials used in the manufacture of products and serving as its basis, piecework wages of the main production workers, depreciation of fixed assets accrued in proportion to the volume of production, and other similar costs.

The simplest version of variable costs is proportional variable costs. They are characterized by the fact that the rate of their change is similar to the rate of change in the volume of production. In other words, if, for example, the number of products in the reporting month increased by 2 times compared to the previous month, then variable costs also increase by 2 times. And if the volume of output decreased by 30%, then the value of proportional variable costs will decrease by the same 30%.

But, as a rule, the rate of change in variable costs is not identical to the rate of change in output.

For example, with an increase in the volume of output, the main raw materials that serve as its basis will be purchased in a larger volume. And the growth in the volume of purchases of raw materials led to the provision of discounts. As a result, the total cost of raw materials, although increasing, is not proportional to the increase in sales. Indeed, in this case, the average variable costs are reduced.

Let's show this with an example:

Thus, with an increase in production by 50%, the total mass of raw materials, which is the main component of product A, increased by the same 50%. However, due to the increase in the volume of purchases and the provision of discounts, the total cost of raw materials (variable costs) increased only by 42.5% ((427,500 rubles - 300,000 rubles) / 300,000 rubles * 100%).

At the same time, average variable costs fell from 300 rubles per piece. (300,000 rubles / 1,000 pcs.) up to 285 rubles / pcs. (427,500 rubles / 1,500 pieces).

Fixed Costs of Production: Examples

Variable production costs do not include costs that are fixed and do not depend on output. It's about fixed costs. However, often fixed costs are conditionally fixed in nature, since their value, as a rule, is unchanged only up to a certain level of output. Once a production milestone has been reached, costs previously identified as fixed may also begin to rise.

Fixed costs of production include the cost of maintaining administrative and managerial personnel, the cost of renting office space, depreciation of fixed assets on a straight-line basis and other similar costs.

Each enterprise incurs certain costs in the course of its activities. There are different ones. One of them provides for the division of costs into fixed and variable.

The concept of variable costs

Variable costs are those costs that are directly proportional to the volume of products and services produced. If an enterprise produces bakery products, then as an example of variable costs for such an enterprise, one can cite the consumption of flour, salt, yeast. These costs will grow in proportion to the growth in the volume of bakery products.

One cost item can relate to both variable and fixed costs. For example, the cost of electricity for industrial ovens that bake bread would serve as an example of variable costs. And the cost of electricity for lighting a production building is a fixed cost.

There is also such a thing as conditionally variable costs. They are related to production volumes, but to a certain extent. With a small level of production, some costs still do not decrease. If the production furnace is loaded halfway, then the same amount of electricity is consumed as for a full furnace. That is, in this case, with a decrease in production, costs do not decrease. But with an increase in output above a certain value, costs will increase.

Main types of variable costs

Let's give examples of variable costs of the enterprise:

• Wages of employees, which depends on the volume of products they produce. For example, in the bakery industry, a baker, a packer, if they have piecework wages. And also here you can include bonuses and remuneration to sales specialists for specific volumes of products sold.
• The cost of raw materials, materials. In our example, these are flour, yeast, sugar, salt, raisins, eggs, etc., packaging materials, bags, boxes, labels.
• are the cost of fuel and electricity, which is spent on the production process. It can be natural gas, gasoline. It all depends on the specifics of a particular production.
• Another typical example of variable costs are taxes paid on the basis of production volumes. These are excises, taxes on tax), USN (Simplified Taxation System).
• Another example of variable costs is paying for the services of other companies, if the volume of use of these services is related to the level of production of the organization. It can be transport companies, intermediary firms.

Variable costs are divided into direct and indirect

This separation exists due to the fact that different variable costs are included in the cost of goods in different ways.

Direct costs are immediately included in the cost of goods.

Indirect costs are allocated to the entire volume of goods produced in accordance with a certain base.

Average variable costs

This indicator is calculated by dividing all variable costs by the volume of production. Average variable costs can both decrease and increase as production volumes increase.

Consider the example of average variable costs in a bakery. Variable costs for the month amounted to 4600 rubles, 212 tons of products were produced. Thus, the average variable costs will amount to 21.70 rubles / ton.

The concept and structure of fixed costs

They cannot be reduced in a short amount of time. With a decrease or increase in output, these costs will not change.

Fixed costs of production usually include the following:

• rent for premises, shops, warehouses;
• utility bills;
• administration salary;
• the cost of fuel and energy resources that are consumed not by production equipment, but by lighting, heating, transport, etc.;
• advertising expenses;
• payment of interest on bank loans;
• purchase of stationery, paper;
• the cost of drinking water, tea, coffee for employees of the organization.

Gross costs

All of the above examples of fixed and variable costs add up to gross, that is, the total costs of the organization. As production volumes increase, gross costs increase in terms of variable costs.

All costs, in fact, are payments for the acquired resources - labor, materials, fuel, etc. The profitability indicator is calculated using the sum of fixed and variable costs. An example of calculating the profitability of the main activity: divide the profit by the amount of costs. Profitability shows the effectiveness of the organization. The higher the profitability, the better the organization performs. If the profitability is below zero, then the costs exceed the income, that is, the organization's activities are inefficient.

Enterprise Cost Management

It is important to understand the essence of variable and fixed costs. With proper management of costs in the enterprise, their level can be reduced and more profit can be obtained. It is practically impossible to reduce fixed costs, so effective work to reduce costs can be carried out in terms of variable costs.

How can you reduce costs in your business?

Each organization works differently, but basically there are the following ways to reduce costs:

1. Reducing labor costs. It is necessary to consider the issue of optimizing the number of employees, tightening production standards. Some employee can be reduced, and his duties can be distributed among the rest with the implementation of his additional payment for additional work. If the enterprise is growing production volumes and it becomes necessary to hire additional people, then you can go by revising production standards and or increasing the amount of work in relation to old workers.

2. Raw materials are an important part of variable costs. Examples of their abbreviations might be as follows:

• search for other suppliers or changing the terms of supply by old suppliers;
• introduction of modern economical resource-saving processes, technologies, equipment;

• cessation of the use of expensive raw materials or materials or their replacement with cheap analogues;
• implementation of joint purchases of raw materials with other buyers from one supplier;
• independent production of some components used in production.

3. Reducing production costs.

This may be the selection of other options for rental payments, the sublease of space.

This also includes savings on utility bills, for which it is necessary to carefully use electricity, water, and heat.

Savings on the repair and maintenance of equipment, vehicles, premises, buildings. It is necessary to consider whether it is possible to postpone repairs or maintenance, whether it is possible to find new contractors for this purpose, or whether it is cheaper to do it yourself.

It is also necessary to pay attention to the fact that it can be more profitable and economical to narrow down production, transfer some side functions to another manufacturer. Or vice versa, enlarge production and carry out some functions independently, refusing to cooperate with subcontractors.

Other areas of cost reduction may be the organization's transportation, advertising, tax relief, debt repayment.

Any business must consider its costs. Working to reduce them will bring more profit and increase the efficiency of the organization.

variable costs These are costs, the value of which depends on the volume of output. Variable costs are opposed to fixed costs, which add up to total costs. The main sign by which it is possible to determine whether costs are variable is their disappearance during a stop in production.

Note that variable costs are the most important indicator of an enterprise in management accounting, and are used to create plans to find ways to reduce their weight in total costs.

What is variable cost

Variable costs have the main distinguishing feature - they vary depending on the actual production volumes.

Variable costs include costs that are constant per unit of output, but their total amount is proportional to the volume of output.

Variable costs include:

raw material costs;

expendable materials;

energy resources involved in the main production;

salary of the main production personnel (together with accruals);

the cost of transport services.

These variable costs are directly charged to the product.

In value terms, variable costs change when the price of goods or services changes.

How to find variable costs per unit of output

In order to calculate the variable costs per piece (or other unit of measure) of the company's products, you should divide the total amount of variable costs incurred by the total amount of finished products, expressed in physical terms.

Classification of variable costs

In practice, variable costs can be classified according to the following principles:

According to the nature of the dependence on the volume of output:

proportional. That is, variable costs increase in direct proportion to the increase in output. For example, the volume of production increased by 30% and the amount of costs also increased by 30%;

degressive. As production increases, the company's variable costs decrease. So, for example, the volume of production increased by 30%, while the size of variable costs increased by only 15%;

progressive. That is, variable costs increase relatively more with output. For example, the volume of production increased by 30%, and the amount of costs by 50%.

Statistically:

general. That is, variable costs include the totality of all variable costs of the enterprise across the entire product range;

average - average variable costs per unit of production or group of goods.

According to the method of attribution to the cost of production:

variable direct costs - costs that can be attributed to the cost of production;

variable indirect costs - costs that depend on the volume of production and it is difficult to assess their contribution to the cost of production.

In relation to the production process:

production;

non-production.

Direct and indirect variable costs

Variable costs are either direct or indirect.

Production variable direct costs are costs that can be attributed directly to the cost of specific products based on primary accounting data.

Production variable indirect costs are costs that are directly dependent or almost directly dependent on the change in the volume of activity, however, due to the technological features of production, they cannot or are not economically feasible to be directly attributed to manufactured products.

The concept of direct and indirect costs is disclosed in paragraph 1 of Article 318 of the Tax Code of the Russian Federation. Thus, according to tax legislation, direct expenses, in particular, include:

expenses for the purchase of raw materials, materials, components, semi-finished products;

wages of production personnel;

depreciation on fixed assets.

Note that enterprises can include in direct costs and other types of costs directly related to the production of products.

At the same time, direct expenses are taken into account when determining the tax base for income tax as products, works, services are sold, and written off to the tax cost as they are implemented.

Note that the concept of direct and indirect costs is conditional.

For example, if the main business is transportation services, then drivers and car depreciation will be direct costs, while for other types of business, maintaining vehicles and remunerating drivers will be indirect costs.

If the cost object is a warehouse, then the storekeeper's wages will be included in direct costs, and if the cost object is the cost of manufactured and sold products, then these costs (storekeeper's wages) will be indirect costs due to the impossibility of unambiguously and in the only way to attribute it to the object costs - cost.

Examples of Direct Variable Costs and Indirect Variable Costs

Examples of direct variable costs are costs:

for the remuneration of workers involved in the production process, including accruals on their wages;

basic materials, raw materials and components;

electricity and fuel used in the operation of production mechanisms.

Examples of indirect variable costs:

raw materials used in complex production;

expenses for research and development, transportation, travel expenses, etc.

conclusions

Due to the fact that variable costs change in direct proportion to the production volume, and the same costs per unit of finished product usually remain unchanged, when analyzing this type of cost, the value per unit of production is initially taken into account. In connection with this property, variable costs are the basis for solving many production problems related to planning.

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Variable Costs: Accountant Details

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