Fixed and variable costs: examples. Variable Cost Example

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Each enterprise incurs certain costs in the course of its activities. There are different classifications of costs. 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, s alt, 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 costs ofelectricity to light 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

Here are examples of variable costs of the enterprise:

• The wages of workers, which depends on the volume of their products. 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.
• Cost of raw materials, materials. In our example, this is flour, yeast, sugar, s alt, raisins, eggs, etc., packaging materials, bags, boxes, labels.
• An example of variable costs is 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 under UST (Unified Social Tax), STS (Simplified Taxation System).
• BAnother example of variable costs is the payment for the services of other companies, if the volume of use of these services is related to the level of production of the organization. These can be transport companies, intermediary firms.

Variable costs are divided into direct and indirect costs

This division 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 the 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 either decrease or 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 be 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 production costs usually include the following:

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

Gross Costs

All of the above examples of fixed and variable costs add up to the 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 purchased 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 expenses exceed the income, that is, the organization's activities are inefficient.

Enterprise cost management

It is important to understand the nature 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 almost impossible to reduce fixed costs, so effective work on cost reduction can be carried out in terms of variable costs.

How to reduce costs in the enterprise

In every organizationwork is built in different ways, 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 expanding service areas or increasing the volume of work for old workers.

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

• search for other suppliers or change the terms of supply of 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;
• carrying out joint purchases of raw materials with other buyers from the same supplier;
• in-house 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, forwhat it is necessary to carefully use electricity, water, heat.

Savings on the repair and maintenance of equipment, vehicles, premises, buildings. Consideration should be given to 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 can be organization 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.