The sum of variable and fixed costs forms the cost of products (works, services).
The dependence of variable and fixed costs on production volume per output and per unit of output is shown in Fig. 10.2.
Fig. 10.2. Dependence of production costs on the number of products produced
The above figure clearly shows that fixed costs per unit products decrease as production volume increases. This indicates that one of the most effective ways to reduce the cost of products is to utilize production capacity as fully as possible.
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Fixed costs do not depend on the dynamics of production volume and sales of products, that is, they do not change when production volume changes.
One part of them is related to the production capacity of the enterprise (depreciation, rent, wages of management personnel on a time basis and general business expenses), the other - with the management and organization of production and sales of products (costs of research, advertising, advanced training of employees, etc. .d.). You can also identify individual fixed costs for each type of product and common ones for the enterprise as a whole.
However, fixed costs calculated per unit of production change as production volume changes.
Variable costs depend on volume and change in direct proportion to changes in the volume of production (or business activity) of the company. As it increases, variable costs also increase, and vice versa, they decrease when it decreases (for example, the wages of production workers who manufacture a certain type of product, the cost of raw materials and supplies). In turn, as part of variable costs allocate costs proportional and disproportionate . Proportional costs vary in direct proportion to production volume. These include mainly the costs of raw materials, basic materials, components, as well as piecework wages of workers. Disproportional costs are not directly proportional to production volume. They are divided into progressive and degressive.
Progressive costs increase more than production volume. They arise when an increase in production volume requires large costs per unit of production (costs of piecework-progressive wages, additional advertising and trade costs). The growth of degrading costs lags behind the increase in production volume. The degressive costs are usually the costs of operating machinery and equipment, various tools (accessories), etc.
In Fig. 16.3. graphically shows the dynamics of total fixed and variable costs.
Dynamics of costs per unit of production looks different. It is easy to build based on certain patterns. In particular, variable proportional costs per unit remain the same regardless of production volume. On the graph, the line of these costs will be parallel to the x-axis. Fixed costs per unit of production decrease along a parabolic curve as its total volume increases. For regressing and progressive costs, the same dynamics remain, only more pronounced.
Variable costs calculated per unit of production are a constant value under given production conditions.
Name it more accurately permanent and variable costs are conditionally constant and conditionally variable. The addition of the word conditional means that variable costs per unit of output can decrease as technology changes at higher output levels.
Fixed costs can change abruptly with a significant increase in output. At the same time, with a significant increase in product output, the technology of its production changes, which leads to a change in the proportional relationship between the change in the quantity of products and the value of variable costs (the angle of inclination on the graph decreases).
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Figure Total costs of the enterprise
Cost of all products calculated as follows:
C - total cost, rub.; a - variable costs per unit of production, rub; N - production volume, pcs; b - fixed costs for the entire volume of production.
Cost calculation units of production:
C unit = a + b/N
With more complete utilization of production capacity, the cost per unit of production decreases. The same thing happens with a significant increase in the scale of output, when variable and fixed costs per unit of output simultaneously decrease.
Analyzing the composition of fixed and variable costs, we derived the following relationship: an increase in revenue will lead to a significantly greater increase in profit if fixed costs remain unchanged.
Besides, there are mixed costs, which contain both constant and variable components. Part of these costs changes with changes in production volume, and the other part does not depend on production volume and remains fixed during the reporting period. For example, a monthly telephone fee includes a fixed subscription fee and a variable part, which depends on the number and duration of long-distance telephone calls.
Sometimes mixed costs are also called semi-variable and semi-fixed. For example, if the economic activity of an enterprise expands, then at a certain stage there may be a need for additional warehouse space to store its products, which, in turn, will cause an increase in rental costs. Thus, fixed costs (rent) will change as activity levels change.
Therefore, when accounting for costs, they must be clearly distinguished between fixed and variable.
Dividing costs into fixed and variable is important in choosing an accounting and costing system. In addition, this grouping of costs is used in the analysis and forecasting of break-even production and, ultimately, for choosing the economic policy of the enterprise.
In paragraph 10 of IFRS 2"Reserves" defined three groups of costs, included in the cost of production, namely: (1) production variable direct costs, (2) production variable indirect costs, (3) production fixed indirect costs, which we will further call production overhead costs.
Table Production costs in cost according to IFRS 2
| Cost type | Composition of costs |
| direct variables | raw materials and basic materials, wages of production workers with accruals for it, etc. These are expenses that, based on primary accounting data, can be attributed directly to the cost of specific products. |
| indirect variables | such expenses that are directly dependent or almost directly dependent on changes in the volume of activity, but due to the technological features of production they cannot or are not economically feasible to be directly attributed to the manufactured products. Representatives of such costs are the costs of raw materials in complex production. For example, when processing raw materials - coal - coke, gas, benzene, coal tar, and ammonia are produced. It is possible to divide the costs of raw materials by type of product in these examples only indirectly. |
| constant indirect | overhead costs that do not change or change little as a result of changes in production volume. For example, depreciation of industrial buildings, structures, equipment; expenses for their repair and operation; expenses for maintaining the workshop management apparatus and other workshop personnel. This group of costs in accounting is traditionally distributed among types of products indirectly in proportion to some distribution base. |
Related information.
Analysis of company performance indicators is an extremely important activity. This makes it possible to identify negative trends that hinder development and eliminate them. Cost formation is an important process on which the company’s net profit depends. In this matter, it is important to know what variable costs are and how they affect the performance of the enterprise. Their analysis applies certain formulas and approaches. You should learn more about how to find out the value of variable costs and how to interpret the results of the study.
general characteristics
Variable Costs (VC) are the costs of an organization that change in quantity according to the volume of production. If the company ceases to function, this indicator will be zero.
Variable costs include such types of costs as raw materials, fuel, energy resources for production. This also includes the salaries of key employees (the part that depends on the implementation of the plan) and sales managers (a percentage of sales).
This also includes tax levies, which are based on the amount of products sold. These are VAT, shares, tax according to the simplified tax system, unified tax, etc.
By calculating the variable costs of an enterprise, it is possible to increase the profitability of the company, provided that all factors influencing them are properly optimized.
Impact of sales volume
There are different types of variable costs. They differ in their defining characteristics and form certain groups. One of these classification principles is the breakdown of variable costs according to their sensitivity to the impact of sales volume on them. They come in the following types:
- Proportional costs. Their response coefficient to changes in production volume (elasticity) is equal to 1. That is, they grow in the same way as sales.
- Progressive costs. Their elasticity index is greater than 1. They increase faster than the volume of production. This is a high sensitivity to changes in conditions.
- Degressive costs respond to changes in sales volume more slowly. Their sensitivity to such changes is less than 1.
It is necessary to take into account the degree of response of changes in costs to an increase or decrease in production output when conducting an adequate analysis.
Other varieties
There are several other signs of classification of this type of costs. Statistically, an organization's variable costs can be general or average. The former include all variable costs for the full range of products, while the latter are determined per unit of product or a specific group of products. 
Based on their attribution to cost, variable costs can be direct or indirect. In the first case, costs are directly included in the sales price of products. The second type of costs is difficult to estimate in order to attribute them to cost. For example, in the process of producing skim milk and cream, finding the cost of each of these items is quite problematic.
Variable costs can be manufacturing or non-manufacturing. The first includes the costs of raw materials, fuel, materials, wages and energy resources. Non-production variable costs should include administrative and commercial expenses.
Calculation
To calculate variable costs, a number of formulas are used. Their detailed study will allow us to understand the essence of the category under consideration. There are several approaches to analyzing the indicator. Variable costs, the formula for which is most often used in production, look like this:
PP = Materials + Raw materials + Fuel + Electricity + Salary bonus + Percentage for sales to sales representatives. 
There is another approach to assessing the presented indicator. It looks like this:
PP = Gross (marginal) profit - fixed costs.
This formula emerges from the statement that the total costs of an enterprise are found by summing up fixed and variable costs. Using one of two approaches, you can assess the state of the indicator at the enterprise. However, if you want to evaluate the factors influencing the variable part of costs, it is better to use the first type of calculation.
Break even
Variable costs, the formula of which was presented above, play an important role in determining the break-even point of the organization.
At a certain equilibrium point, the enterprise produces such a volume of products at which the amount of profit and costs coincides. In this case, the company's net profit is equal to 0. Marginal profit at this level corresponds to the amount of fixed costs. This is the break-even point. 
It shows the minimum acceptable level of income at which the company's activities will be profitable. Based on such a study, the analytical service must determine a safe zone in which the minimum acceptable level of sales will be achieved. The higher the indicators from the break-even point, the greater the indicator of stability of the organization’s work and its investment rating.
How to apply calculations
When calculating variable costs, you should take into account the determination of the break-even point. This is due to a certain pattern. As variable costs increase, the break-even point shifts. At the same time, the profitability zone moves even higher on the chart. As production costs increase, a company must produce more products. And the cost of this product will also be higher. 
Ideal calculations use linear relationships. But when conducting research in real production conditions, a nonlinear relationship may be observed.
For the model to work accurately, it must be applied in short-term planning and for stable product categories that are not dependent on demand.
Ways to reduce costs
To reduce variable costs, you can consider several ways to influence the situation. It is possible to take advantage of the effect of increasing production. With a significant increase in production volume, the change in variable costs becomes nonlinear. At a certain point, their growth slows down. This is the breaking point.
This happens for several reasons. Initially, management costs are reduced. With such events, it is possible to conduct scientific research and introduce technological innovations into the production process. The size of defects is reduced and product quality is improved. Fuller utilization of production capacity also has a positive effect on the indicator.
Having become familiar with the concept of variable costs, you can correctly use the methodology for calculating them in determining the development paths of the enterprise.
The expenses of any enterprise include so-called forced costs. They are associated with the acquisition or use of various means of production.
Cost classification
All costs of an enterprise are divided into variable and fixed. The latter includes payments that do not affect the volume of products produced. Accordingly, we can say, . Among them, in particular, are the costs of renting premises, management costs, payment for risk insurance services, payment of interest for the use of credit funds, etc.
What expenses are considered variable costs?? This category of costs includes payments that directly affect production volume. Variable expenses include costs for raw materials and materials, remuneration of personnel, purchase of packaging, logistics, etc.
Fixed costs always exist throughout the entire operation of the enterprise. Variable costs, in turn, are absent when the production process is stopped.
This classification is used to determine the company's development strategy over a certain period.
In the long run, all types of costs can treat variable expenses. This is due to the fact that they all, to a certain extent, influence the volume of output of finished products and profit from the production process.
Cost value
Over a relatively short period, the enterprise will not be able to radically change the method of production of goods, capacity parameters, or begin the production of alternative products. However, variable cost indices can be adjusted during this time. This, in fact, is the essence of cost analysis. The manager, by adjusting individual parameters, changes the production volume.
It is impossible to significantly increase the quantity of output by adjusting this index. The fact is that at a certain stage of increasing only those costs that will not lead to a significant jump in growth rates - it is necessary to adjust part of the fixed costs. In this case, you can rent additional production space, launch another line, etc.
Types of variable costs
All the costs that refer to variable expenses, are divided into several groups:
- Specific. This category includes costs that arise after the creation and sale of one unit of goods.
- Conditional. TO conditionally variable expenses include all costs directly proportional to the current quantity of products produced.
- Average variables. This group includes average values of specific costs taken over a certain period of time of operation of the enterprise.
- Direct variables. This type of cost is related to the production of products of a particular type.
- Limit variables. These include the costs incurred by the enterprise when producing each additional unit of goods.
Material costs
Variable expenses include costs included in the cost of the final (finished) product. They reflect the cost:
- Raw materials/materials obtained from third party suppliers. These materials or raw materials must be used directly in the production of the product or be part of the components necessary to create it.
- Work/services provided by other business entities. For example, the enterprise used a control system supplied by a third party, the services of a repair team, etc.
Sales costs
TO variables include expenses for logistics. We are talking, in particular, about transport costs, costs of accounting, movement, write-off of valuables, costs of delivering finished products to warehouses of trading enterprises, to retail points, etc.
Depreciation deductions
As you know, any equipment used in the production process wears out over time. Accordingly, its effectiveness decreases. To avoid the negative impact of moral or physical wear and tear on the production process, the enterprise transfers a certain amount to a special account. At the end of its service life, these funds can be used to modernize obsolete equipment or purchase new ones.
Deductions are made in accordance with depreciation rates. The calculation is made based on the book value of fixed assets.
The amount of depreciation is included in the cost of finished products.
Remuneration of personnel
Variable expenses include not only the direct earnings of the company’s employees. They also include all mandatory deductions and contributions established by law (amounts to the Pension Fund, Compulsory Medical Insurance Fund, personal income tax).
Calculation
A simple summation method is used to determine the amount of costs. It is necessary to add up all the costs incurred by the enterprise over a certain period of time. For example, the company 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.
Adding up the indicators, we find the total amount of variable costs - 155 thousand rubles. Based on this value and production volume, their specific share in the cost can be found.
Let's say the company produced 500 thousand products. Specific costs will be:
155 thousand rubles. / 500 thousand units = 0.31 rub.
If the enterprise produced 100 thousand more goods, then the share of expenses will decrease:
155 thousand rubles. / 600 thousand units = 0.26 rub.
Break even
This is a very important indicator for planning. It represents the state of the enterprise in which production is carried out without loss for the company. This state is ensured by the 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 minimum quantity of products needs to be produced in order for all costs to be recouped.
Let's take the data from the previous example with some minor additions. Let's say the fixed costs are 40 thousand rubles, and the estimated cost of a unit of goods is 1.5 rubles.
The amount 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 exactly how many units of product the enterprise must produce and sell to cover all costs, i.e., to break even.
Variable expense rate
It is determined by indicators of estimated profit when adjusting the amount of production costs. For example, when new equipment is put into operation, the need for the same number of employees will no longer be required. Accordingly, the volume of the wage fund may be reduced due to a decrease in their number.
Classification of costs.
A scientifically based classification of costs is of great importance for the correct organization of cost accounting. Production costs are grouped according to their place of origin, responsibility centers, cost carriers and types of expenses.
According to the place of origin, costs are grouped by production, workshop, site and other structural divisions of the enterprise. This grouping of costs is necessary for:
- monitoring the performance of structural divisions and the enterprise as a whole;
- distribution of overhead costs between individual types of products when calculating the cost of products (works, services).
Costs are distributed among responsibility centers (enterprise segments) to accumulate data on costs and control deviations from the estimate. A cost center is an organizational unit or area of activity where it is advisable to accumulate information about the costs of acquiring assets and expenses.
Cost carriers are the types of products (works, services) of an enterprise intended for sale. This grouping is necessary to determine the cost per unit of production (work, services).
By type, costs are grouped by economically homogeneous elements and by costing items in accordance with the Regulations on the composition of costs for the production and sale of products (works, services) included in the cost of products (works, services).
For management accounting purposes, costs are divided into categories depending on what management problem needs to be solved.
Classification of costs depending on the goals of management accounting
| Tasks | Cost classification |
| Calculation of the cost of manufactured products, assessment of the value of inventories and profit received | Incoming and expired Direct and indirect Basic and invoices Included in cost (production) and costs of the reporting period (periodic) Single element and complex Current and one-time |
| Management decision making and planning | Constant and variable Accepted and not taken into account in assessments Irrevocable and repayable Imputed (lost profit) Marginal and incremental Planned and unplanned |
| Control and regulation | Adjustable and non-adjustable |
Fixed and variable costs.
They are used when conducting break-even analysis and related indicators, as well as when optimizing manufactured products.
In relation to the volume of production or sales (level of business activity), costs are divided into “fixed” and “variable”.
Variable costs change in proportion to the volume of production or sales, and those calculated per unit of production are a constant value. An example of variable costs for a trading enterprise is the cost of purchased goods, commissions and other expenses associated with sales, which change in proportion to changes in sales volume.
Dynamics of total (a) and specific (b) variable costs.
SP - total variable costs, rub. UPer - specific variable costs, rub.
Fixed costs in total do not change with changes in the level of business activity, but calculated per unit decrease with an increase in the volume of production or sales. Examples of fixed costs include rental costs, administrative salaries, and professional services. The total amount of these expenses is relatively independent of sales volume.
When dividing expenses into variable and fixed, you need to use the concept " area of relevance", in which a special relationship between the planned relationship between revenue and costs is maintained. Thus, fixed expenses are constant relative to a specific period, for example one year, but over time, due to the influence of external factors, they can increase or decrease (changes in the property tax rate, etc.).
Dynamics of total (a) and specific (b) fixed costs.
Spost - total fixed costs, rub. Upost - fixed costs per unit of production (specific), rub.
Some types of costs cannot be strictly defined in relation to production volume as variable or variable. Therefore, in management accounting, an additional group of semi-variable or semi-fixed costs is distinguished. These costs have both fixed and variable components. For example, the costs of maintaining a warehouse:
- Constant component - rental of warehouse space and utilities
- Variable component - warehouse processing services (operations for moving commodity items)
When classifying costs, variable and fixed components are separated into independent expense items, therefore semi-variable or semi-fixed costs are not allocated to a separate group.
Costs taken into account and not taken into account when assessing.
The process of making a management decision involves comparing several alternative options in order to select the best one. The indicators compared can be divided into two groups: the first remain unchanged for all alternative options, the second vary depending on the decision made. It is advisable to compare only the indicators of the second group. These costs, which distinguish one alternative from another, are called relevant costs. Only they are taken into account when making decisions.
Example. An enterprise selling products on the foreign market purchased basic materials for future use in the amount of 500 rubles. Subsequently, due to changes in technology, it turned out that these materials were of little use for our own production. Products made from them will be uncompetitive in the foreign market. However, the Russian partner is ready to buy products made from these materials from this enterprise for 800 rubles. In this case, the additional costs of the enterprise for the production of products will amount to 600 rubles. Is it advisable to accept such an order?
Expired costs for the purchase of materials in the amount of 500 rubles. have already taken place. They do not influence the choice of solution and are not relevant. Let's compare the alternatives based on relevant indicators (table).
By choosing alternative 2, the company will reduce its loss from the purchase of unnecessary materials by 200 rubles, reducing it from 500 to 300 rubles.
Approaches to cost reduction analysis.
Cost structure analysis
Construction of a cost management system.
- Classification of costs.
- Methodology for allocating costs by department, type of activity and type of product:
- bases and principles of cost distribution;
- formats of primary cost reporting forms;
- methodology for filling out primary reporting forms;
- a methodology for processing primary reporting forms that allows you to distribute costs between types of products, accounting objects and types of activities;
- formats of management cost reports.
- Choosing a costing method.
- Consider cost reduction opportunities.
- Conducting cost-volume-profit analysis.
Costing method based on variable costs ("direct-costing").
Its essence lies in a fundamentally new approach to the inclusion of costs in the cost price. Costs are divided into fixed and variable. Only variable costs are included in prime cost. To determine it, the amount of variable costs is divided by the number of products produced and services provided. Fixed costs are not included in the cost calculation at all, but as expenses of a given period are written off from the profit received during the period in which they were incurred. In other words, before calculating the operating profit, the company’s marginal profit indicator is formed, and only then, by reducing the company’s marginal profit by the amount of fixed costs, the financial result is formed.
There are many opinions about the legality of such incomplete inclusion of costs in the cost price. International accounting standards prohibit the use of this approach for preparing a company's financial statements in financial accounting. The main argument against this is the thesis that fixed costs are also involved in the process of creating products. But on the other hand, it turns out that fixed costs participate in different ways in creating the cost of different volumes of the same product, and it is almost impossible to calculate the actual participation of fixed costs in creating the cost, so their cost is simply written off from the profit received by the company.
Below are brief summary characteristics of the "direct-costing" and "absorption-costing" costing methods.
| "Direct-costing" | "Absorption-costing" |
| Based on accounting for specific production costs. Fixed expenses are included in the entire amount into the financial result and are not allocated to types of products. | It is based on the distribution of all costs included in the cost by type of product (calculation of the total cost of production). |
| It assumes the division of costs into fixed and variable. | It involves breaking down costs into direct and indirect. |
| It is used for more flexible pricing, as a result of which the competitiveness of products increases. It makes it possible to determine the profit brought by the sale of each additional unit of product, and, accordingly, the ability to plan prices and discounts for a certain sales volume. | It is used most often in Russian enterprises. Mainly used for external reporting. |
| Finished goods inventories are valued at direct costs only. | Product inventories in the warehouse are valued at full cost, including components of fixed production costs. |
Marginal profit- is the excess of sales revenue over all variable costs associated with a given sales volume.
Therefore, the contribution margin method is based on the following formula:
Marginal profit = Revenue from product sales - Variable costs for the same volume of production
If we subtract fixed costs from marginal profit, we get the operating profit:
Operating profit = Contributory profit - Fixed costs
Example. The difference in the impact of full and variable cost accounting methods on the cost of goods sold. Let direct material costs per product be $59,136, direct labor costs $76,384, variable manufacturing overhead costs $44,352, and fixed manufacturing overhead costs $36,960. During the year, 24,640 units of products were produced. There was no work in progress either at the beginning or at the end of the reporting period. The unit selling price is $24.50 and the variable selling costs per unit are $4.80. Fixed selling expenses for the period are $48,210 and fixed administrative expenses are $82,430.
| Variable Cost Accounting | Full cost accounting | |
| Unit cost | ||
| Direct material costs ($59,136:24,640 units) | $2,40 | $2.40 |
| Direct labor costs ($76,384:24,640 units) | 3.10 | 3.10 |
| Variable overhead costs ($44,352:24,640 units) | 1.80 | 1.80 |
| Fixed overhead costs ($36,960:24,640 units) | - | 1.50 |
| Total cost per unit of production | $7,30 | $8.80 |
| Finished goods balance at the end of the year (2,640 x $7.30) (2,640 x $8.80) | 19,272 | 23,232 |
| Cost of goods sold (22,000 x $7.30) (22,000 x $8.80) | 160,600 | 193,600 |
| 36,960 | - | |
| Total costs reported in the income statement | $197,560 | $193,600 |
| Total costs to be accounted for | $216,832 | $ 216,832 |
Profit and Loss Statement (Margin Approach).
Revenues from sales $539,000
Variable portion of cost of goods sold
- Variable part of the cost of goods for sale $179,872
Minus Final balances of finished products $19,272
Variable portion of cost of goods sold $160,600
Plus Variable Selling Expenses (22,000 x $4.80) $105,600 $266,200
Marginal profit $272,80 0
Minus Fixed expenses
- Fixed overhead costs $36,960
Fixed business expenses $48,210
Permanent administrators expenses $82,430 $167,600
Operating profit (before tax) $105,200
Example. Price per unit - 10 thousand rubles, variable costs per unit - 6 thousand rubles, fixed overhead costs amounted to 300 thousand rubles. for the period, fixed general expenses amounted to 100 thousand rubles. during the period.
| Period 1 | Period 2 | Period 3 | Period 4 | Period 5 | Period 6 | |
| Sales volume (pieces) | 150 | 120 | 180 | 150 | 140 | 160 |
| Production volume (pieces) | 150 | 150 | 150 | 150 | 170 | 140 |
Full cost costing method.
| (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | |
| Period 1 | Period 2 | Period 3 | Period 4 | Period 5 | Period 6 | |
| Prod. expenses | ||||||
| Cost of goods sold | ||||||
| Volume of sales | ||||||
| Gross profit | ||||||
| General economic expenses | ||||||
| Operating profit |
Direct costing method of cost calculation.
| (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | (thousand roubles.) | |
| Period 1 | Period 2 | Period 3 | Period 4 | Period 5 | Period 6 | |
| Inventories of finished products in the warehouse at the beginning of the period | ||||||
| Prod. AC expenses | ||||||
| Inventories of finished goods in warehouse at the end of the period | ||||||
| Cost of products sold at variable costs | ||||||
| Fixed overhead costs | ||||||
| Total production. expenses | ||||||
| Volume of sales | ||||||
| Gross profit | ||||||
| General economic expenses | ||||||
| Operating profit |
Operating leverage.
As you know, costs are the costs of an enterprise expressed in monetary terms for the production of goods.
It is very important for any company to have the most complete information about costs. This allows you to correctly set the price of manufactured products, calculate the level of efficiency of processes, learn about the efficiency of resource use by specific departments, etc.
Definition
In general, specialists divide costs into fixed and variable e. Fixed costs do not depend on the level of output. These include renting premises, costs for personnel retraining, payment of utilities, etc.
The amount of variable costs depends on the volume of products produced. The main feature: when production stops, this type of waste disappears.
It should be noted that this division is very arbitrary. For example, conditionally variable costs are also distinguished. Their value depends on the company’s business activity, but such dependence is not direct. These include, for example, long-distance calls as part of the subscription fee for telephone services.
As a rule, variable expenses can be considered direct. This means that, firstly, they are directly related to the production of a product or service, and secondly, they can be included in the cost of goods based on primary documentation without any additional calculations.
You can find out more detailed information about these indicators in the following video:
Varieties
Without delving into the essence of the problem, one can decide that the growth of such costs grows with an increase in production volume, with an increase in product sales, etc. However, this is not entirely true. Depending on the nature of the output volume, variable costs include:
- proportional, which increase with an increase in production volume (if the production of goods increases by 20%, then spending proportionally increases by 20%);
- regressive variables, the growth rate of which is slightly behind the growth rate of production (if production increases by 20%, spending can only increase by 15%);
- progressive variable, which increase slightly faster than the production and sale of goods increases (if production increases by 20%, spending increases by 25%).
Thus, we see that the value of variable costs is not always directly proportional to the volume of production. For example, if, in the event of an expansion of the enterprise and an increase in the volume of output, a night shift is introduced, then the payment for it will be higher.
Direct and indirect costs among the variables are distinguished rather arbitrarily:
- Usually to straight lines refers to the costs that may be associated with the production of a particular product. They relate directly to the cost of the product. This could be spending on raw materials, fuel or wages for workers.
- To indirect General shop and plant expenses can be included, that is, those associated with the production of a group of goods. Due to factors such as technological specifics or economic feasibility, they cannot be attributed directly to cost. The most common example is the purchase of raw materials in complex industries.
In statistical documentation, expenses are divided into total and average. This division makes sense in the reporting documents of enterprises:
- Average are calculated by dividing variable expenses by the volume of goods produced.
- Are common is the sum of the organization's fixed and variable costs.
We can also talk about production and non-production types. This division is directly related to the manufacturing process of products:
- Production are included in the cost of goods. They are tangible and can be inventoried.
- Non-productive they no longer depend on production volumes, but on duration. Therefore, it is impossible to inventory them.
Thus, we can highlight the following most common examples of variable costs in production:
- wages of workers, depending on the volume of goods produced by them;
- the cost of raw materials and other materials necessary for the manufacture of products;
- expenses for warehousing, transportation and storage of goods;
- interest paid to sales managers;
- taxes related to production volumes: VAT, excise taxes, etc.;
- services of other organizations related to production services;
- the cost of energy resources at enterprises.
How to count them?
For convenience, variable costs can be expressed schematically as follows:
- Variable expenses = Raw materials + Supplies + Fuel + Percentage of wages, etc.
For the convenience of calculating the dependence of expenses on production volume, the German economist Mellerovich introduced cost response factor (K). The formula showing the relationship between cost changes and productivity growth looks like this:
K = Y/X, Where:
- K is the cost response coefficient;
- Y – cost growth rate (in percent);
- X is the growth rate of production (trade exchange, business activity), also calculated as a percentage.
- 110% / 110% = 1
The response coefficient of progressive spending will be greater than one:
- 150% / 100% = 1,5
Therefore, the coefficient of regressive expenses is less than 1, but more than 0:
- 70% / 100% = 0,7
The cost of any unit of production can be expressed by the following formula:
Y= A + bX, Where:
- Y denotes total costs (in any monetary unit, for example, rubles);
- A – constant part (i.e. one that does not depend on production volumes);
- b – variable expenses, which are calculated per unit of product (expense response coefficient);
- X is an indicator of the enterprise’s business activity, presented in natural units.
AVC = VC/Q, Where:
- AVC – average variable costs;
- VC – variable costs;
- Q – volume of output.
On the graph, average variable costs are usually presented as an increasing curved line.
