Variable costs include the cost of What costs are variable costs?

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

In the composition of the costs of any enterprise there are so-called forced costs. They are associated with the acquisition or use of different means of production.

Cost classification

All costs of the enterprise are divided into variable and fixed. The latter include payments that do not affect the volume of output. Accordingly, we can say which costs are not variable. Among them, in particular, the cost of renting premises, management costs, payment for risk insurance services, payment of interest for the use of credit funds, etc.

Which costs are variable costs? This category of costs includes payments that directly affect the volume of production. Variable costs include the cost of raw materials, staff salaries, purchase of packaging, logistics, etc.

Fixed costs always exist, throughout the life of the enterprise. Variable costs, in turn, are absent when the production process is stopped.

This classification is usedto determine the company's development strategy for a certain period.

In the long run, all types of costs can be classified as variable costs. This is due to the fact that all of them, to some extent, affect the volume of output of finished products and profit from the production process.

Value of costs

In a relatively short period, the company will not be able to radically change the way goods are produced, capacity parameters or start producing alternative products. However, during this time it is possible to adjust the indexes of variable costs. This, in fact, is the essence of cost analysis. The manager, by adjusting individual parameters, changes the volume of production.

It is impossible to significantly increase the amount of output by adjusting this index. The fact is that at a certain stage, an increase in only those costs that relate to variable costs will not lead to a significant jump in growth rates - part of the fixed costs also needs to be adjusted. In this case, you can rent additional production space, launch another line, etc.

Types of variable costs

All costs related to variable costs are divided into several groups:

• Specific. This category includes costs that arise after the creation and sale of one unit of goods.
• Conditional. Conditionally variable costs include all costs that are directly proportional to the currentnumber of products produced.
• Average variables. This group includes average values of unit costs taken over a certain period of time of the enterprise.
• Direct variables. This type of cost is related to the production of a particular type of product.
• Limit variables. These include the costs incurred by the enterprise for the release of each additional unit of goods.

Material costs

Variable costs include costs included in the cost of the final (finished) product. They reflect the cost:

• Incoming raw materials/materials obtained from third party suppliers. These materials or raw materials must be used directly in the production of products or be part of the components necessary to create them.
• Works/services provided by other business entities. For example, the enterprise used the control system supplied by a third party, the services of a repair team, etc.

Implementation costs

Variables include logistics costs. We are talking, in particular, about transportation costs, costs for accounting, movement, write-off of valuables, costs for the delivery of finished products to warehouses of trade enterprises, retail outlets, etc.

Depreciation charges

As you know, any equipment used in the production process wears out over time. Accordingly, its effectiveness is reduced. To avoid negativethe impact of obsolescence or physical deterioration of equipment on the production process, the enterprise transfers a certain amount to a special account. These funds at the end of their service life can be used to upgrade obsolete equipment or purchase new ones.

Deductions are made in accordance with depreciation rates. The calculation is based on the book value of fixed assets.

Depreciation is included in the cost of finished products.

Personnel compensation

Variable expenses include not only direct earnings of employees of the enterprise. They also include all mandatory deductions and contributions established by law (amounts in the Pension Fund of the Russian Federation, the Compulsory Medical Insurance Fund, personal income tax).

Calculation

To determine the amount of costs, a simple summation method is used. It is necessary to add up all the costs incurred by the enterprise during a certain time. For example, the firm spent:

• 35 thousand rubles for materials and raw materials for production.
• 20 thousand rubles – for the purchase of packaging and logistics.
• 100 thousand rubles – to pay salaries to employees.

After summing up the indicators, we find the total amount of variable costs - 155 thousand rubles. Based on this value and the volume of production, you can find their specific share in the cost.

Let's say the company has produced 500 thousand items. Unit costs will be:

155 thousand rubles / 500 thousand units=0, 31 rub.

If the enterpriseproduced 100 thousand more goods, then the share of expenses will decrease:

155 thousand rubles / 600 thousand units=0, 26 rub.

Break-even point

This is a very important indicator for planning. It represents the state of the enterprise in which the output is carried out without loss to the company. This state is ensured by a balance of variable and fixed costs.

The break-even point must be determined at the planning stage of the production process. This is necessary so that the management of the enterprise knows what the minimum amount of products needs to be produced in order to pay off all costs.

Let's take the data from the previous example with a few additions. Let's say the amount of fixed costs is 40 thousand rubles, and the estimated cost of a unit of goods is 1.5 rubles.

The value of all costs will be - 40 + 155=195 thousand rubles.

The break-even point is calculated as follows:

195 thousand rubles / (1, 5 – 0, 31)=163,870.

This is how many units of production the company must produce and sell to cover all costs, i.e., to go to zero.

Variable expense rate

It is determined by the indicators of the estimated profit when adjusting the amount of production costs. For example, when new equipment is put into operation, the need for the previous number of employees will disappear. Accordingly, the volume may be reducedwage fund due to a decrease in their number.