Variable costs: an example. Types of production costs

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

general characteristics

The variable costs of a company (Variable Cost, VC) are those costs of an organization that change with increasing or decreasing growth in the sales of manufactured products. For example, if the company stops operating, the variable costs must be zero. The enterprise, in order to carry out its activities efficiently, will need to regularly evaluate the indicator of its costs. After all, they affect the size of the cost of finished products and turnover.

Such variable items include such items.

• The book value of raw materials, energy resources, materials that take a direct part in the production of finished products.
• Cost of manufactured products.
• Salary of employees, depending on the fulfillment of the plan.
• Interest from the activities of sales managers.
• Taxes: VAT, collection on USN, UST.

Understanding variable costs

To properly understand such a concept as variable costs, an example of their definition should be considered in more detail. Thus, production in the process of carrying out its production programs spends a certain amount of materials from which the final products will be manufactured. These costs can be attributed to variable direct costs. But some of them should be divided. Such a factor as electricity can be attributed to constant costs. If the cost of lighting the territory is taken into account, then they should be attributed to this category. Electric power, directly involved in the process of manufacturing products, is in the short run to variable costs.

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

Therefore, in order to measure the efficiency of the enterprise's activity in the sphere of managing its costs, variable costs should be considered as being subject to a linear schedule on a segment of normal production capacity.

Classification

There are several types of classification of variable costs. With the change in costs from sales, there are:

• Proportional costs, which increase in exactly the same way as production;
• Progressive costs, increasing at a greater pace than implementation;
• Degressive costs, which increase with the growth of production rates at a slower rate.

According to the statistics, the variable costs of the firm can be:

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

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

With regard to technological output, they can be productive (fuel, raw materials, energy, etc.) and non-productive (transportation, interest to intermediary, etc.).

General variable costs

The function of the volume of production is similar to variable costs. It is continuous. When all costs are brought together to analyze, the total variable costs for all products of one enterprise are obtained.

When common variables 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 the variable costs on the volume of production. Further under the formula find variable marginal costs:

MS = ΔVC / ΔQ, where:

• MC - marginal variable costs;
• ΔVC - increment of variable costs;
• ΔQ is the increase in output.

Such dependence allows to calculate influence of variable costs on the general result of realization of production.

Calculation of average costs

Average variable costs (AVC) are the company's resources spent per unit of production. In a certain range, production growth has no influence on them. But when the estimated capacity is reached, they begin to increase. This behavior of the factor is explained by the heterogeneity of costs and their increase at large scales of production.

The presented indicator is calculated as follows:

AVC = VC / Q, where:

• VC - the number of variable costs;
• Q is the quantity of output.

According to the measurement parameters, the average variable costs in the short term are similar to the change in the average total costs. The larger the output of finished products, the greater the total costs begin to correspond to the growth of variable costs.

Calculation of variable costs

Based on the above, you can define the variable cost formula (VC):

• VC = Materials costs + Raw materials + Fuel + Electricity + Premium salary + Interest from sales to agents.
• VC = Gross profit - constant costs.

The sum of the variables and fixed costs is equal to the indicator of the total costs of the organization.

Variable costs, the example of calculation of which was presented above, participate in the formation of their total indicator:

Total costs = Variable costs + Constant costs.

Example definition

To get a deeper understanding of the principle of calculating variable costs, consider an example from the calculations. For example, the company characterizes its output by such items:

• Expenses for materials and raw materials.
• Energy costs for production.
• Salary of workers who produce products.

It is argued that variable costs are directly proportional to the growth of 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 of production. If you plot the graph, then the break-even production level will be zero. If the volume is reduced, the company's activities will move to the unprofitable level. And similarly, with increasing 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 the strategy of using the "economies of scale", which manifests itself with an increase in output.

The reasons for its appearance is the following.

1. Using the achievements of science and technology, conducting research, which increases the manufacturability of production.
2. Reducing the cost of salaries for managers.
3. Narrow specialization of production, which allows you to perform each stage of production tasks more qualitatively. At the same time, the percentage of rejects is reduced.
4. The 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 sales growth. This will increase the efficiency of the company.

Having familiarized with such a concept as the variable costs, an example of calculation of which was given in this article, financial analysts and managers can develop a number of ways to reduce the total costs of production and reduce the cost of production. This will give an opportunity to effectively manage the pace of turnover of the enterprise's products.