Fixed and variable expenses of the enterprise. Variable costs

As we remember, we need a business plan not only to understand the goals and ways to achieve them, but also to justify the profitability and possibility of implementing our investment project.

When making calculations for a project, you come across the concept of fixed and variable costs, or expenses.

What are they and what is their economic and practical meaning for us?

Variable expenses, by definition, are those expenses that are not constant. They change. And the change in their value is associated with the volume of products produced. The larger the volume, the higher variable expenses.

What cost items are included in them and how to calculate them?

All resources that are spent on production can be classified as variable costs:

• materials;
• components;
• wage workers;
• electricity consumed by a running machine engine.

Cost of all necessary resources that must be spent to produce a certain volume of output. This is all material costs, plus wages of workers and maintenance personnel, plus the cost of electricity, gas, water spent in the production process, plus packaging and transportation costs. This also includes the costs of creating stocks of materials, raw materials and components.

Variable costs need to be known per unit of output. Then we can calculate at any time the total amount of variable costs for a certain period of time.
We simply divide the estimated cost of production by the volume of production in physical terms. We obtain variable costs per unit of production.

This calculation is made for each type of product and service.

How does unit costing differ from the variable cost of producing one product or service? Fixed costs are also included in the calculation.

Fixed costs are almost independent of production volumes.

These include:

• administrative expenses (costs of maintaining and renting offices, postal services, travel expenses, corporate communications);
• production maintenance costs (rent of production premises and equipment, machine maintenance, electricity, space heating);
• marketing expenses (product promotion, advertising).

Fixed costs remain unchanged until certain point until the production volume becomes too large.

An important step for determining variable and fixed costs, as well as everything financial plan is the calculation of personnel costs, which can also be carried out at this stage.

Based on the data we received in the organizational plan on structure, staffing, operating hours, as well as focusing on the data from the production program, we calculate personnel costs. We make this calculation for the entire period of the project.

It is necessary to determine the amount of remuneration for management personnel, production and other employees, as well as the total amount of expenses.

Don’t forget to take into account taxes and social contributions, which will also be included in the total amount.

All data is presented in tabular form for ease of calculation.

Knowing fixed and variable costs, as well as product prices, you can calculate the break-even point. This is the level of sales that ensures the enterprise’s self-sufficiency. At the break-even point, there is equality in the sum of all costs, fixed and variable, and the income from the sale of a certain volume of products.

Analysis of the break-even level will allow us to draw a conclusion about the sustainability of the project.

An enterprise should strive to reduce variable and fixed costs per unit of production, but this is not a direct indicator of production efficiency. It is necessary to take into account the specifics of the enterprise. High fixed costs may be in high-tech industries, and low - in underdeveloped ones with old equipment. This can also be observed when analyzing variable costs.

The main goal of your company is to maximize economic profit. And this is not only cutting costs in any way, but also using various tools to reduce production and management costs through the use of more productive equipment and increased labor productivity.

One of the main features of financial management (as well as management accounting) is that it divides costs into two main types:

a) variable or margin;

b) constant.

With this classification, it is possible to estimate how much the total cost will change with an increase in production volumes and sales of products. In addition, by estimating the total income for different volumes of products sold, it is possible to measure the amount of expected profit and cost with an increase in sales volumes. This method of management calculations is called break-even analysis or income assistance analysis.

Variable costs- these are costs that, with an increase or decrease in the volume of production and sales of products, respectively increase or decrease (in total). Variable costs per unit of output produced or sold represent the additional costs incurred in creating that unit. Such variable costs are sometimes called marginal costs per unit produced or sold, which are the same for each additional unit. Graphical total, variable and fixed costs are shown in Fig. 7.

Fixed costs are costs whose value is not affected by changes in the volume of production and sales of products. Examples of fixed costs are:

a) salary of management personnel, which does not depend on the volume of products sold;

b) rent for premises;

c) depreciation of machinery and mechanisms, accrued using the straight-line method. It is accrued regardless of whether the equipment is used partially, completely, or is completely idle;

d) taxes (on property, land).

Rice. 7. Graphs of total (total) costs

Fixed costs are the unchanging costs for this period time. Over time, however, they increase. For example, the rent for industrial premises for two years is twice the rent for a year. Similarly, depreciation charged on capital goods increases as the capital goods age. For this reason, fixed costs are sometimes called periodic costs because they are constant over a specific period of time.

General level fixed costs may vary. This happens when the volume of production and sales of products increases or decreases significantly (purchase of additional equipment - depreciation, recruitment of new managers - wages, hiring of additional premises - rent).

If the selling price of a unit of a certain type of product is known, then the gross revenue from the sale of this type of product is equal to the product of the selling price of a unit of product by the number of units sold.

As sales volume increases by one unit, revenue increases by the same or constant amount, and variable costs also increase by a constant amount. Therefore, the difference between the selling price and the variable costs of each unit of output must also be constant. This difference between the selling price and unit variable costs is called gross profit per unit.

Example

A business entity sells a product for 40 rubles. per unit and expects to sell 15,000 units. There are two technologies for producing this product.

A) The first technology is labor-intensive, and variable costs per unit of production are 28 rubles. Fixed costs are equal to 100,000 rubles.

B) The second technology uses equipment that facilitates labor, and variable costs per unit of production are only 16 rubles. Fixed costs are equal to 250,000 rubles.

Which of the two technologies allows you to get higher profits?

Solution

The break-even point is the volume of product sales at which the revenue from its sale is equal to the gross (total) costs, i.e. there is no profit, but there are also no losses. Gross profit analysis can be used to determine the break-even point because if

revenue = variable costs + fixed costs, then

revenue - variable costs = fixed costs, i.e.

total gross profit = fixed costs.

To break even, the total gross profit must be sufficient to cover fixed costs. Since the total gross profit is equal to the product of the gross profit per unit of product and the number of units sold, the break-even point is determined as follows:

Example

If the variable costs per unit of product are 12 rubles, and the proceeds from its sale are 15 rubles, then the gross profit is equal to 3 rubles. If fixed costs are 30,000 rubles, then the break-even point is:

30,000 rub. / 3 rub. = 10,000 units

Proof

Gross profit analysis can be used to determine the volume of sales (sales) of products required to achieve the planned profit for a given period.

Because the:

Revenue - Gross costs = Profit

Revenue = Profit + Gross costs

Revenue = Profit + Variable costs + Fixed costs

Revenue - Variable costs = Profit + Fixed costs

Gross profit = Profit + Fixed costs

The required gross profit must be sufficient: a) to cover fixed costs; b) to obtain the required planned profit.

Example

If a product is sold for 30 rubles, and unit variable costs are 18 rubles, then the gross profit per unit of product is 12 rubles. If fixed costs are equal to 50,000 rubles, and the planned profit is 10,000 rubles, then the sales volume required to achieve the planned profit will be:

(50,000 + 10,000) / 125,000 units.

Proof

Example

Estimated profit, break-even point and target profit

XXX LLC sells one type of product. Variable costs per unit of production are 4 rubles. At a price of 10 rubles. demand will be 8,000 units, and fixed costs will be 42,000 rubles. If you reduce the price of the product to 9 rubles, then demand increases to 12,000 units, but fixed costs will increase to 48,000 rubles.

You need to determine:

a) estimated profit at each selling price;

b) break-even point at each selling price;

c) the volume of sales required to achieve the planned profit of 3,000 rubles at each of the two prices.

b) To break even, gross profit must equal fixed costs. The break-even point is determined by dividing the sum of fixed costs by the gross profit per unit of production:

42,000 rub. / 6 rub. = 7,000 units

48,000 rub. / 5 rub. = 9,600 units

c) The total gross profit required to achieve the planned profit of 3,000 rubles is equal to the sum of fixed costs and planned profit:

Break-even point at a price of 10 rubles.

(42,000 + 3,000) / 6 = 7,500 units.

Break-even point at a price of 9 rubles.

(48,000 + 3,000) / 5 = 10,200 units.

Gross profit analysis is used in planning. Typical cases of its application are as follows:

a) choosing the best selling price for the product;

b) choosing the optimal technology for producing a product if one technology gives low variable and high fixed costs, and the other gives higher variable costs per unit of production, but lower fixed costs.

These problems can be solved by determining the following quantities:

a) estimated gross profit and profit for each option;

b) break-even sales volume of products for each option;

c) the volume of product sales necessary to achieve the planned profit;

d) the volume of product sales at which two different production technologies give the same profit;

e) the volume of product sales necessary to eliminate the bank overdraft or to reduce it to a certain level by the end of the year.

When solving problems, it is necessary to remember that the volume of product sales (i.e., demand for products at a certain price) is difficult to accurately predict, and the analysis of the estimated profit and break-even volume of product sales should be aimed at taking into account the consequences of failure to meet planned targets.

Example

New company TTT is created to produce a patented product. Company directors are faced with a choice: which of two production technologies to prefer?

Option A

The company purchases parts, assembles finished products from them, and then sells them. Estimated costs are:

Option B

The company acquires optional equipment, allowing you to perform some technological operations on the company’s own premises. Estimated costs are:

The maximum possible production capacity for both options is 10,000 units. in year. Regardless of the sales volume achieved, the company intends to sell the product for 50 rubles. for a unit.

Required

Conduct an analysis of the financial results of each of the options (as far as available information allows) with appropriate calculations and diagrams.

Note: taxes are not taken into account.

Solution

Option A has higher variable costs per unit of output, but also lower fixed costs than Option B. The higher fixed costs of Option B include additional depreciation amounts (for more expensive premises and new equipment), as well as interest costs on bonds, since option B involves the company in financial dependence. The above decision does not address the concept of debt, although it is part of the full answer.

The estimated output volume is not given, so the uncertainty of product demand must be important element solutions. However, it is known that the maximum demand is limited by production capacity (10,000 units).

Therefore we can define:

a) maximum profit for each option;

b) break-even point for each option.

a) if the need reaches 10,000 units.

Option B gives higher profits with higher sales volumes.

b) to ensure break-even:

Break-even point for option A:

80,000 rub. / 16 rub. = 5,000 units

Break-even point for option B

185,000 rub. / 30 rub. = 6,167 units

The break-even point for option A is lower, which means that if demand increases, profit under option A will be received much faster. In addition, when demand is low, option A results in higher profits or lower losses.

c) if option A is more profitable at low sales volumes, and option B is more profitable at high volumes, then there must be some point of intersection at which both options have the same total profit for the same total product sales volume. We can determine this volume.

There are two methods for calculating sales volume at the same profit:

Graphic;

Algebraic.

The most visual way to solve the problem is to plot the dependence of profit on sales volume. This graph shows the profit or loss for each sales value for each of the two options. It is based on the fact that profit increases evenly (straightforward); gross profit for each additional unit of product sold is a constant value. In order to build a straight-line profit graph, you need to plot two points and connect them.

With zero sales, the gross profit is zero, and the company suffers a loss in an amount equal to fixed costs (Fig. 8).

Algebraic solution

Let the sales volume at which both options give the same profit be equal to x units. Total profit is total gross profit minus fixed costs, and total gross profit is gross profit per unit multiplied by x units.

According to option A, the profit is 16 X - 80 000

Rice. 8. Graphic solution

According to option B, the profit is 30 X - 185 000

Since with sales volume X units the profit is the same, then

16X - 80 000 = 30X - 185 000;

X= 7,500 units

Proof

An analysis of the financial results shows that due to the higher fixed costs of option B (partly due to the cost of paying interest on the loan), option A comes to breakeven much faster and is more profitable up to a sales volume of 7,500 units. If demand is expected to exceed 7,500 units, then option B will be more profitable. Therefore, it is necessary to carefully study and evaluate the demand for this product.

Since the results of demand assessment can rarely be considered reliable, it is recommended to analyze the difference between the planned volume of product sales and the break-even volume (the so-called “safety zone”). This difference shows how much the actual volume of product sales can be less than planned without loss for the enterprise.

Example

A business entity sells a product at a price of 10 rubles. per unit, and variable costs are 6 rubles. Fixed costs are equal to 36,000 rubles. The planned sales volume of products is 10,000 units.

Planned profit is determined as follows:

Break even:

36,000 / (10 - 6) = 9,000 units.

The “safety zone” is the difference between the planned volume of product sales (10,000 units) and the break-even volume (9,000 units), i.e. 1,000 units As a rule, this value is expressed as a percentage of the planned volume. Thus, if in this example the actual sales volume of products is less than planned by more than 10%, the company will not be able to break even and will incur a loss.

The most complex gross profit analysis is calculating the volume of sales required to eliminate a bank overdraft (or reduce it to a certain level) during a specified period (year).

Example

An economic entity buys a machine to produce a new product for 50,000 rubles. The price structure of the product is as follows:

The machine is purchased entirely through an overdraft. In addition, all other financial needs are also covered by an overdraft.

What should be the annual volume of products sold to cover the bank overdraft (by the end of the year), if:

a) all sales are made on credit and debtors pay them within two months;

b) reserves finished products are stored in the warehouse for one month until sold and are assessed in the warehouse at variable costs (as work in progress);

c) suppliers of raw materials provide a business entity with a monthly loan.

In this example, a bank overdraft is used to purchase the machine, as well as to cover general operating costs (all of which are paid in cash). Depreciation is not a cash expense, so the amount of overdraft is not affected by the amount of depreciation. During the manufacture and sale of a product, variable costs are incurred, but they are covered by revenue from the sale of products, resulting in the formation of a gross profit.

The gross profit per unit of product is 12 rubles. This figure may suggest that the overdraft can be covered with a sales volume of 90,000 / 12 = 7,500 units. However, this is not the case, since it ignores the increase in working capital.

A) Debtors pay for the goods they purchase on average after two months, so out of every 12 units sold, two remain unpaid at the end of the year. Consequently, on average, out of every 42 rubles. sales (unit price) one sixth (RUB 7) at the end of the year will be outstanding receivables. The amount of this debt will not reduce the bank overdraft.

B) Similarly, at the end of the year there will be a month's supply of finished products in the warehouse. The cost of producing these products is also an investment in working capital. This investment requires funds, which increases the overdraft amount. Since this increase in inventories represents the monthly sales volume, it is on average equal to one-twelfth of the variable costs of producing a unit of output (2.5 rubles) sold during the year.

C) The increase in accounts payable compensates for the investment in working capital, since at the end of the year, due to the provision of a monthly loan, on average, out of every 24 rubles spent on the purchase of raw materials (24 rubles - material costs per unit of production), 2 rubles . will not be paid.

Let's calculate the average cash receipts per unit of production:

To cover the cost of the machine and operating expenses and thus eliminate the overdraft for the year, product sales must be

90,000 rub. / 4.5 rub. (cash) = 20,000 units.

With an annual sales volume of 20,000 units. profit will be:

The effect on cash receipts is best illustrated by the balance sheet example of a change in cash position:

In aggregate form as a source and use report Money:

Profits are used to finance the purchase of the machine and investment in working capital. Therefore, by the end of the year the following change in the cash position occurred: from an overdraft to a “no change” position - i.e. the overdraft has just been repaid.

When solving such problems, a number of features should be taken into account:

– depreciation expenses should be excluded from fixed costs;

– investments in working capital are not fixed expenses and do not affect the break-even analysis at all;

– draw up (on paper or mentally) a report on the sources and use of funds;

– expenses that increase the size of the overdraft are:

– purchase of equipment and other fixed assets;

– annual fixed costs, excluding depreciation.

The gross profit ratio is the ratio of gross profit to selling price. It is also called the "income-revenue ratio." Since unit variable costs are a constant value and, therefore, at a given selling price, the amount of gross profit per unit of product is also constant, the gross profit coefficient is a constant for all values ​​of sales volume.

Example

Specific variable costs for a product are 4 rubles, and its selling price is 10 rubles. Fixed costs amount to 60,000 rubles.

The gross profit ratio will be equal to

6 rub. / 10 rub. = 0.6 = 60%

This means that for every 1 rub. the income received from sales, the gross profit is 60 kopecks. To ensure break-even, gross profit must be equal to fixed costs (60,000 rubles). Since the above coefficient is 60%, the gross revenue from product sales required to ensure break-even will be 60,000 rubles. / 0.6 = 100,000 rub.

Thus, the gross profit ratio can be used to calculate the break-even point

The gross profit ratio can also be used to calculate the volume of product sales required to achieve a given profit level. If a business entity wanted to make a profit in the amount of 24,000 rubles, then the sales volume should have been the following amount:

Proof

If the problem gives sales revenue and variable costs, but does not give the selling price or unit variable costs, you should use the gross profit ratio method.

Example

Using the Gross Profit Ratio

The business entity has prepared a budget for its activities for the next year:

The company's directors are not satisfied with this forecast and believe that it is necessary to increase sales.

What level of product sales is necessary to achieve a given profit of 100,000 rubles.

Solution

Since neither the selling price nor specific variable costs are known, gross profit should be used to solve the problem. This coefficient has a constant value for all sales volumes. It can be determined from the available information.

Analysis of decisions made

Analysis of short-term decisions involves choosing one of several possible options. For example:

a) selection of the optimal production plan, product range, sales volumes, prices, etc.;

b) choosing the best of mutually exclusive options;

c) deciding on the advisability of conducting a particular type of activity (for example, whether an order should be accepted, whether an additional work shift is needed, whether to close a department or not, etc.).

Decisions are made in financial planning when it is necessary to formulate the production and commercial plans of an enterprise. Analysis of decisions made in financial planning often comes down to the application of variable costing methods (principles). The main task of this method is to determine which costs and incomes will be affected by the decision made, i.e. what specific costs and revenues are relevant for each of the proposed options.

Relevant costs are costs of a future period that are reflected in cash flow as a direct consequence of the decision made. Only relevant costs should be considered in the decision-making process, since it is assumed that future profits will ultimately be maximized provided that the business entity's "monetary profit", i.e. cash income received from the sale of products minus cash costs for production and sales of products are also maximized.

Costs that are not relevant include:

a) past costs, i.e. money already spent;

b) future expenses resulting from previously decisions made;

c) non-cash costs, for example, depreciation.

The relevant costs per unit of output are typically the variable (or marginal) costs of that unit.

It is assumed that profits ultimately produce cash receipts. Declared profit and cash receipts for any period of time are not the same thing. This is explained for various reasons, for example, time intervals when granting loans or features of depreciation accounting. Ultimately, the resulting profit gives a net influx of an equal amount of cash. Therefore, in decision accounting, cash receipts are treated as a means of measuring profit.

The “price of chance” is the income that the company refuses, preferring one option to the most profitable alternative option. Let us assume as an example that there are three mutually exclusive options: A, B and C. The net profit for these options is equal to 80, 100 and 90 rubles, respectively.

Since you can choose only one option, option B seems to be the most profitable, since it gives the greatest profit (20 rubles).

A decision in favor of B will be made not only because he makes a profit of 100 rubles, but also because he makes a profit of 20 rubles. more profit than the next most profitable option. "Opportunity cost" can be defined as "the amount of revenue that a company sacrifices in favor of an alternative option."

What happened in the past cannot be returned. Management decisions only affect the future. Therefore, in the decision-making process, managers only need information about future costs and income that will be affected by the decisions made, since they cannot affect past costs and profits. Past expenses in decision-making terminology are called sunk costs, which:

a) either have already been accrued as direct costs for the manufacture and sale of products for the previous reporting period;

b) or will be accrued in subsequent reporting periods, despite the fact that they have already been made (or the decision to make them has already been made). An example of such a cost is depreciation. After the acquisition of fixed assets, depreciation may accrue over several years, but these costs are sunk.

Relevant costs and income are deferred income and expenses arising from the choice of a particular option. They also include revenues that could have been earned by choosing another option, but which the enterprise foregoes. "Opportunity value" is never shown in financial statements, but it is often mentioned in decision-making documents.

One of the most common problems in the decision-making process is making decisions in a situation where there are not enough resources to meet potential demand and a decision must be made on how to most effectively use the available resources.

The limiting factor, if any, should be determined when preparing the annual plan. Limiting factor decisions therefore relate to routine rather than ad hoc actions. But even in this case, the concept of “cost of chance” appears in the decision-making process.

There may be only one limiting factor (other than maximum demand), or there may be several limited resources, two or more of which may set the maximum level of activity that can be achieved. To solve problems with more than one limiting factor, operations research methods (linear programming) should be used.

Solutions to Limiting Factors

Examples of limiting factors are:

a) volume of product sales: there is a limit to the demand for products;

b) labor force ( total and by specialty): there is a shortage work force to produce a volume of products sufficient to meet demand;

c) material resources: there is not a sufficient amount of materials to manufacture products in the volume necessary to meet demand;

d) production capacity: the productivity of technological equipment is insufficient to produce the required volume of products;

d) financial resources: there is not enough cash to pay the necessary production costs.

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

Exist different types 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:

1. 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.
2. 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.
3. 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.

She shows minimally permissible level 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, the 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. At such events it is possible to carry out Scientific research and implement in manufacturing process technological innovations. 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.

They are divided into variables and constants. Their main difference is that some change with increasing production volume, while others do not. However, fixed and variable costs include costs related to production and sales. When production activities cease, part of the expenses disappears and becomes zero. Let's look at what variable costs include. An example of costs will also be given in the article.

Composition of expenses

Variable costs include:

1. Commercial expenses (percentages from sales to sales managers and other remunerations, as well as% paid to outsourcing companies).
2. Cost of goods produced.
3. Salary of working personnel (part of the salary, which depends on the standards met).
4. The cost of fuel, raw materials, materials, electricity and other resources involved in production activities.

Variable costs also include some taxes: VAT, excise taxes, deductions under the simplified tax system, unified tax on premiums.

Purpose of calculation

Behind each coefficient, indicator or concept it is necessary to see their economic meaning. If we talk about the goals of the enterprise, then, in general, there are two of them: reducing costs or increasing income. When these concepts are generalized, the profitability of the company arises. The higher this indicator is, the more stable the financial position of the company will be, the more opportunities will appear to attract additional borrowed funds, expand technical and production capacities. In this case, the enterprise can increase its own value on the market and increase its investment attractiveness. Division is used in management accounting. Company managers need to know what variable costs include. There is no line showing this group of expenses in the financial statements. Determining the amount of these costs in general structure allows you to analyze the company's activities. Management, knowing that variable costs include, by balancing expenses and income, has the opportunity to consider different management strategies for increasing the profitability of the company.

Production and sales volume

To better understand what variable costs include, you should consider their division depending on certain characteristics. Based on production and sales volumes, the following are distinguished:

How to reduce costs?

One of the options for reducing variable costs is the use of “economies of scale”. It appears with an increase in production volume and the transition from serial to mass production of products. The graph shows that as output increases, a certain point is reached. In it, the relationship between the amount of expenses and production volume becomes nonlinear. At the same time, the rate at which variable costs change is lower than the intensity of growth in output/sales of goods. The reasons for this effect include:

Static indicator

Based on this, expenses are divided into:

1. Are common.
2. Average.

Total variable costs include all costs related to a given category across the entire product line. Average costs include costs per unit. products or group of products.

Financial Accounting

When carrying out accounting, we distinguish:

Attitude to the process

According to this criterion, production and non-production types are distinguished. The first relate to the production process directly. Such variable costs include the cost of materials, raw materials, energy, fuel resources, wages to workers, and so on. Non-production costs not directly related to product output. These include, for example, transportation costs, agent commissions and other management and commercial costs.

Calculation

The formula looks like this:

- Variable expenses = Costs of raw materials + materials + fuel + electricity + bonuses to salary + % of sales.

- Variable costs= gross - fixed costs.

Break even

Let's consider the role of variable costs in its determination. The break-even point directly depends on these costs. When a company reaches a certain production volume, a moment of equilibrium occurs. At this point, the amount of losses and profits coincides. In this case, net income is equal to 0, and marginal income equals fixed costs. This point indicates the minimum critical production level at which the enterprise is considered profitable. The company's task is to create a safety zone and create a level of production and sales of products that would ensure the maximum distance from the break-even point. The further the enterprise is from this point, the higher its financial stability, profitability, and competitiveness. As variable costs increase, this point moves.

Important point

The model discussed above usually operates linear connections between production volume and profit/expenses. In practice, these dependencies are often nonlinear. This situation is due to the fact that the size of production is influenced by a number of factors. These include:

• Seasonality of demand.
• Technologies used.
• Activities of competitors.
• Taxes.
• Macroeconomic indicators.
• "Effect of scale".
• Subsidies and more.

To ensure the accuracy of the model, it must be applied in the short term to products with stable demand.

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 presented 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 papers, advertising, to improve the skills of employees, etc.). 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 output 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 manufacturing certain type products, costs 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 constant amount of the 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 economic activity the enterprise is expanding, 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. Besides, this group costs are used in analyzing and forecasting 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

Related information.