Variable production costs. What are fixed and variable costs

There are several classifications of costs. Most often, costs are divided into fixed and variable. We will tell you what applies to each type of cost and give examples.

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Cost classification

All costs of the enterprise according to their dependence on production volumes can be divided into fixed and variable.

Fixed costs are company expenses that do not depend on the volume of production, sales, etc. These are costs that are necessary for the normal operation of the company. For example, rent. No matter how much the store sells goods, rent is a constant value per month.

Variable costs, on the other hand, depend on the volume of production. For example, this is the salary of salespeople, which is expressed as a percentage of sales. The more sales a company has, the more sales.

Fixed costs per unit of output decrease with an increase in production volume, and, on the contrary, increase with a decrease in the rate of sales. Variable costs remain always the same per unit of goods.

Economists call such costs conditionally fixed and conditionally variable. For example, rent cannot be infinitely independent of the volume of production. Anyway, at some point the production area will not be enough and more space will be required.

That is, we can say that conditionally variable costs are directly related to the main activity, while conditionally fixed costs are more related to the activities of the enterprise as a whole, to its functioning.

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What will help: contains illustrative examples of building classifiers of objects, carriers and cost items.

fixed costs

Conditionally fixed costs include costs, the absolute value of which does not change significantly with a change in the volume of output. That is, these costs arise even with a simple organization. These are general business expenses. Such expenses will always exist while the enterprise carries out its economic and financial activities. They are there regardless of whether it receives income or not.

Even if the organization does not significantly change the volume of production, then fixed costs can still change. Firstly, the production technology is changing - it is required to purchase new equipment, train personnel, etc.

What is included in fixed costs (examples)

1. Salary of management personnel: chief accountant, financial director, general director, etc. The salaries of these employees are most often a salary. Of course, twice a month, employees receive this money, regardless of how efficient the organization is and whether the founders make a profit ( ).

2. Company insurance premiums from the salaries of management personnel. These are mandatory payroll payments. As a general rule, contributions are 30 percent + contributions to the Social Insurance Fund from accidents at work and prof. diseases.

3. Rent and utilities. Rental costs do not depend on the profits and revenues of the company. Monthly payment is required to the landlord. If the company does not fulfill this condition of the lease, the owner of the premises may terminate the contract. Then there is a possibility that for some time it will be necessary to curtail the business.

4. Credit and lease payments . If necessary, the company borrows money from the bank. Paying with a credit institution is required every month. That is, regardless of whether the company worked in profit or at a loss.

5. Spending on security. Such expenses depend on the area of ​​protected premises, the level of protection, etc. But they do not depend on the volume of production.

6. Costs for advertising and promotion of goods. Almost every company spends money to promote a product. Indirectly, there is a relationship between advertising and sales, and, accordingly, production. But it is believed that these are independent of each other quantities.

The question often arises, is depreciation a fixed or variable cost? It is believed to be permanent. After all, the company accrues depreciation every month, regardless of whether it received income or not.

Costs that practically do not depend on the volume of output. All fixed costs per unit of output or output decrease as output increases. It testifies to growth of incomes of the company.

Fixed costs are the basis for creating production. They arise at a point in time when they have not yet begun to produce their goods. Costs for the modernization of production, the purchase of modern machines and mechanisms, or the construction of industrial premises are not considered fixed.

It is beneficial for the entrepreneur to reduce fixed costs and increase the number of goods produced. In such a situation, there is an increase in profits. This situation is typical for a market with constantly changing demand for goods. Provided that demand remains virtually unchanged, reducing fixed costs will only lead to a one-time profit.

Fixed costs may change over time as the business operates in a constantly changing environment. Therefore, they are often called conditionally fixed costs in practice.

Basic expenses of a fixed type

When determining the cost of production, it is necessary to take into account all fixed costs, which include:

• Payment of rent or on the property of the enterprise. These costs are fixed, so their change over time is negligible. The amount of tax or rent is the same amount over a long period of time. These costs can be reduced by renting production facilities or equipment.

• Depreciation of enterprise equipment. With the linear method of calculating monthly depreciation deductions, their value is referred to as expenses of a constant type, since they are deducted in the same payments throughout the entire period of operation.

• Payment of wages to employees involved in the management of the enterprise. Their wages are not affected by the volume of production. The reduction of this cost item is achieved by optimizing the number of management personnel.

• Payment for services related to the general management of the enterprise. First of all, these are the costs associated with the protection of the enterprise, utility costs, fees for.

• Payments of accrued interest on loans and borrowings. This type of expenses can be included in the list of expenses for the profitable operation of production. If regular payment of interest leads to a reduction in profits, and after a while to the bankruptcy of the enterprise, then these payments should be completely suspended. Otherwise, the company will declare itself bankrupt.

Probably, every person who has worked for at least one day for the “master” wants to start his own business and be his own boss. But in order to open your own business, which will bring good earnings, you need to correctly set the financial model of economic activity.

Financial model of the enterprise

What is it for? In order to have a correct idea of ​​future income, what level the company's fixed and variable expenses will have, understand where you will need to strive and what financial policy to use when making decisions.

The basis for building a successful business is its commercial component. According to economic theory, money is goods that can and should generate new goods. In the case of opening your own business, you need to understand that its profitability should come first, otherwise a person will engage in patronage.

Can't work at a loss

Profit is equal to the difference between income and costs, which are divided into fixed and variable costs of the enterprise. When expenses are greater than income, the profit turns into a loss. The main task of the entrepreneur is to make sure that the business brings the maximum income with the minimum use of available resources.

This means that it is always worth trying to sell as many goods or services as possible, while reducing the cost level of the enterprise.

If everything is more or less clear with income (how much he made, how much he sold), then with expenses it is much more difficult. In this article, we will look at fixed and variable costs, as well as how to optimize costs and find a middle ground.

In this article, expenses, costs and costs, as well as in the economic literature, will be used as synonymous words. So what are the types of costs?

Types of expenses

All costs of the enterprise can be divided into fixed and variable costs. This separation allows for the prompt implementation of budgeting and planning the necessary resources for the business of the enterprise.

Fixed costs are those costs that do not depend on the volume of output produced. That is, no matter how many units you produce, your fixed costs will not change.

Variable and conditionally fixed costs affect production activities in different ways. Why conditionally constant? Because not all types of expenses can be classified as permanent, since they can change their properties and accounting procedure from time to time.

What do variable and fixed costs include?

For example, such expenses include the salaries of administrative and managerial personnel, but if they receive money regardless of the financial results of the enterprise. Despite the fact that in the West, managers have long been earning on their managerial and organizational skills, increasing their client base and expanding markets, in most enterprises of the Russian Federation, heads of various structures receive a stable monthly salary without being tied to work results.

This leads to the fact that a person simply does not have an incentive to improve something in his work. Because of this, labor productivity is at a low level, and the desire to move forward to new technological processes is generally at zero.

fixed costs

In addition to the salaries of managers, rent payments can be attributed to fixed costs. Imagine that you are in the tourism business and you do not have your own premises.

In such a case, you will be forced to pay someone to rent commercial real estate. And no one says that this is the worst option. The cost of building your own office from scratch is very high and in many cases will not pay off even in 5-10 years if the business belongs to the small or middle class.

Therefore, many prefer to take the necessary square meters as a lease. And you can immediately guess that regardless of whether your business went well or you are at a deep loss, the landlord will require a monthly payment indicated by the contract.

What can be even more stable in accounting than the payment of wages? This is the depreciation charge. Any fixed asset must be depreciated from month to month until its initial cost is zero.

Methods for calculating depreciation may be different, but, of course, within the framework of the law. These monthly costs are also referred to as fixed costs of the enterprise.

There are many more such examples: communication services, garbage collection or recycling, providing the necessary working conditions, etc. Their main feature is that they are easy to calculate both in the current period and in the future.

Variable costs

Such costs are those that vary in direct proportion to the volume of products or services provided.

For example, there is such a line in the balance sheet item as raw materials and materials. They indicate the total cost of those funds that the company needs for production activities.

Suppose you need 2 square meters of wood to produce one wooden box. Accordingly, to create a batch of 100 such products, you will need 200 square meters of material. Therefore, such costs can be safely attributed to variables.

Wages can refer not only to fixed, but also to variable costs. This will be the case when:

• the changed volume of production requires a change in the number of employees employed in the manufacturing process;
• workers receive percentages that correspond to deviations in the working rate of production.

Under such circumstances, it is quite difficult to plan the amount of labor costs in the long term, since it will already depend on at least two factors.

Also, in the process of production activity, fuel and various kinds of energy resources are consumed: light, gas, water. If all these resources are used directly in the manufacturing process (for example, the production of a car), then it will be logical that a large batch of products will require an increased amount of energy consumed.

Why do you need to know what fixed and variable costs are?

Of course, such a classification of costs is needed to optimize the cost structure in order to increase profits. That is, you can immediately understand what costs can be saved, and what will be in any case, and it will be possible to reduce them only by reducing the level of production. What does the analysis of variable and fixed costs look like?

Let's say you're manufacturing furniture at an industrial level. Your cost items are as follows:

• raw materials and materials;
• wage;
• depreciation;
• light, gas, water;
• other.

While everything is easy and understandable.

The first step is to divide all this into fixed and variable costs.

Permanent:

1. Salaries of directors, accountants, economists, lawyers.
2. Depreciation deductions.
3. Used electrical energy for lighting.

Variables include the following.

1. The wages of workers, the normalized number of which depends on the volume of furniture produced (one or two shifts, the number of people in one assembly box, etc.).
2. Raw materials and materials needed to produce one unit of output (wood, metal, fabric, bolts, nuts, screws, etc.).
3. Gas or electricity, if these resources are consumed directly for the manufacture of furniture. For example, this is the consumption of electricity by various furniture assembly machines.

The impact of costs on the cost of production

So, you have painted all the expenses of your business. Now let's see what role fixed and variable costs play in the cost price. It is necessary to sort through all the fixed costs and see how you can optimize the structure of the enterprise so that fewer management personnel are involved in the production process.

The composition of fixed and variable costs shown above shows where to start. You can save on energy resources either by switching to alternative sources, or by upgrading in order to increase the level of equipment efficiency.

After that, it is worth sorting out all the variable costs, tracking which of them are more or less dependent on external factors, and which can be calculated with confidence.

Once you understand the cost structure, you can easily transform any business to suit the needs and requirements of any owner and their strategic plans.

If your goal is to reduce the cost of products in order to win several positions in the sales market, then you should pay more attention to variable costs.

Of course, as soon as you understand what relates to fixed and variable expenses, you will already be able to easily navigate and quickly understand where you need to "tighten your tails" and where you can "dissolve your belts".

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 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. 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 transport, 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.

As you know, the cost is called expressed in monetary terms, the costs of the enterprise for the production of goods.

It is very important for any firm 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, experts divide costs into fixed and variable e. Fixed costs do not depend on the level of output. They include the rent of premises, the cost of retraining staff, payment of utilities, etc.

The amount of variable costs depends on the volume of output. The main feature: when production is stopped, this type of spending disappears.

It should be noted that this division is very conditional. For example, there are also conditionally variable costs. Their value depends on the business activity of the company, but this dependence is not direct. These include, for example, long-distance calls as part of the subscription fee for telephone services.

Typically variable costs can be attributed to 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 learn more about these indicators from 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 sales of products, etc. However, this is not entirely true. Depending on the nature of the volume of output, among the variable costs are:

• proportional, which increase with an increase in the volume of production (if the production of goods increases by 20%, then spending increases proportionally by 20%);
• regression variables, whose growth rate is slightly behind the growth rate of production (if production increases by 20%, spending can increase by only 15%);
• progressive variables, which increase somewhat faster than the increase in production and sales of goods (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 case of 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 conditionally:

• Usually to direct refers to the costs that may be associated with the production of a particular product. They relate directly to the cost of goods. It can be spending on raw materials, fuel or wages for workers.
• To indirect general shop, general factory expenses, that is, those associated with the manufacture of a group of goods, can be attributed. Due to factors such as technological specificity or economic feasibility, they cannot be attributed directly to the cost. The most common example is the purchase of raw materials in complex industries.

In statistical documentation, expenses are divided into general and average. Such a division makes sense in the reporting documents of enterprises:

• Medium calculated by dividing variable costs by the volume of goods produced.
• Are common is the sum of fixed and variable costs of the organization.

You can also talk about production and non-production types. This division is directly related to the manufacturing process of products:

• Production included in the cost of goods. They are tangible and inventoryable.
• non-production However, they no longer depend on the volume of production, but on the duration. Therefore, it is impossible to inventory them.

Thus, we can single out 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, excises, etc.;
• services of other organizations related to maintenance of production;
• the cost of energy resources at enterprises.

How to count them?

For convenience, variable costs can be schematically expressed as follows:

• Variable costs = Raw materials + Materials + Fuel + Percentage of wages, etc.

For the convenience of calculating the dependence of costs on the volume of production, the German economist Mellerovich introduced cost response factor (K). The formula showing the relationship between cost change and productivity growth looks like this:

K = Y/X, Where:

• K is the cost response factor;
• Y is the growth rate of costs (in percent);
• X - production growth rates (goods exchange, business activity), also calculated as a percentage.

• 110% / 110% = 1

The progressive spending response rate will be greater than one:

• 150% / 100% = 1,5

Therefore, the coefficient of regressive spending is less than 1, but greater than 0:

• 70% / 100% = 0,7

The cost of any unit of output can be expressed by the following formula:

Y= A + bX, Where:

• Y denotes total costs (in any monetary unit, for example, rubles);
• A is the constant part (that is, the one that does not depend on production volumes);
• b - variable costs that are calculated per unit of product (expenditure response rate);
• X is an indicator of the business activity of the enterprise, presented in natural units.

AVC=VC/Q, Where:

• AVC - average variable costs;
• VC - variable costs;
• Q is the volume of output.

On the graph, average variable costs are usually presented as an ascending curve.