Variable costs: an example. Types of production costs

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

Enterprise costs can be considered in the analysis from different points of view. Their classification is based on various features. From the standpoint of the impact of product turnover on costs, they can be dependent or independent of the increase in sales. Variable costs, an example of the definition of which requires careful consideration, allow the head of the company to manage them by increasing or decreasing the sale of finished products. Therefore, they are so important for understanding the correct organization of the activities of any enterprise.

General characteristics

Variable Costs (VC) are the costs of the organization that change with an increase or decrease in the growth of sales of manufactured products.

For example, when a company goes out of business, variable costs should be zero. To operate effectively, a business will need to evaluate its cost performance on a regular basis. After all, it is theyaffect the cost of finished products and turnover.

The following items are classified as variable costs.

• The book value of raw materials, energy resources, materials that are directly involved in the production of finished products.
• Cost of manufactured products.
• Salary of employees, depending on the implementation of the plan.
• Percentage from the activities of sales managers.
• Taxes: VAT, STS fee, UST.

Understanding variable costs

To correctly understand such a concept as variable costs, an example of their definition should be considered in more detail. Thus, production in the course of carrying out its production programs spends a certain amount of materials from which the final product will be made.

These costs can be classified as variable direct costs. But some of them should be shared. A factor such as electricity can also be attributed to fixed costs. If the cost of lighting the territory is taken into account, then they should be attributed to this category. Electricity directly involved in the process of manufacturing products is classified as a variable cost in the short term.

There are also costs that depend on turnover but are not directly proportional to the production process. Such a trend may be caused by insufficient workload (or excess) of production, a discrepancy between its design capacity.

Therefore, in order to measure the effectivenessactivities of the enterprise in the field of managing its costs, you should consider variable costs as subject to a linear schedule on a segment of normal production capacity.

Classification

There are several types of variable cost classifications. With a change in costs from implementation, a distinction is made:

• proportional costs that increase in the same way as output;
• progressive costs increasing faster than sales;
• degressive costs, which increase at a slower rate as the rate of production increases.

According to statistics, the company's variable costs can be:

• total (Total Variable Cost, TVC), which are calculated for the entire product range;
• average (AVC, Average Variable Cost), calculated per unit of goods.

According to the method of accounting in the cost of finished products, variable costs are distinguished direct (they are simply attributed to the cost) and indirect (it is difficult to measure their contribution to the cost).

Regarding the technological output of products, they can be industrial (fuel, raw materials, energy, etc.) and non-productive (transportation, interest to an intermediary, etc.).

Total variable costs

The output function is similar to variable costs. She is continuous. When all costs are brought together for analysis, the total variable costs for all products of one enterprise are obtained.

When the total variable and fixed costs are combined, their total amount in the enterprise is obtained. This calculation is carried out in order to reveal the dependence of variable costs on the volume of production. Further, according to the formula, variable marginal costs are found:

MC=ΔVC/ΔQ, where:

• MC - marginal variable cost;
• ΔVC - increase in variable costs;
• ΔQ - increase in output.

This dependence allows you to calculate the impact of variable costs on the overall result of product sales.

Calculation of average costs

Average variable cost (AVC) is the company's resources spent per unit of output. Within a certain range, production growth has no effect on them. But when the design capacity is reached, they begin to increase. This behavior of the factor is explained by the heterogeneity of costs and their increase with large scale production.

The presented indicator is calculated as follows:

AVC=VC/Q where:

• VC - number of variable costs;
• Q - the number of products produced.

In terms of measurement parameters, average variable costs in the short run are similar to changes in average total costs. The greater the output of finished goods, the more total costs begin to match the increase in variable costs.

Variable cost calculation

Based on the above, the variable cost (VC) formula can be defined as:

• VC=Cost ofmaterials + Raw materials + Fuel + Electricity + Bonus salary + Percentage of sales to agents.
• VC=Gross Profit - Fixed Costs.

The sum of variable and fixed costs equals the total cost of the organization.

Variable costs, the calculation example of which was presented above, are involved in the formation of their overall indicator:

Total costs=Variable costs + Fixed costs.

Definition example

To better understand the principle of calculating variable costs, consider an example from the calculations. For example, a company characterizes its output with the following points:

• Expenses for materials and raw materials.
• Energy cost of production.
• Salary of workers producing products.

It is argued that variable costs grow in direct proportion with the increase in sales of finished products. This fact is taken into account to determine the break-even point.

For example, it was calculated that the break-even point was 30 thousand units. If you build a graph, then the level of break-even production will be equal to zero. If the volume is reduced, the company's activities will move into the plane of unprofitability. And similarly, with an increase in production volumes, the organization will be able to receive a positive net profit result.

How to reduce variable costs

Increase the efficiency of the enterprise can be a strategy of using the "scale effect", whichmanifests itself with an increase in production volumes.

The reasons for its appearance are the following.

1. Using the achievements of science and technology, conducting research, which improves the manufacturability of production.
2. Reducing the cost of executive salaries.
3. Narrow specialization of production, which allows us to perform each stage of production tasks with higher quality. This reduces the percentage of marriage.
4. Introduction of technologically similar production lines, which will provide additional capacity utilization.

At the same time, the growth rate of variable costs is observed below the sales growth. This will increase the efficiency of the company.

Familiarizing yourself with the concept of variable costs, the example of which was given in this article, financial analysts and managers can develop a number of ways to reduce the total cost of production and reduce the cost of production. This will make it possible to effectively manage the rate of turnover of the company's products.