The costs of the enterprise can be considered in the analysis from various points of view. Their classification is based on various characteristics. From the standpoint of the impact of product turnover on costs, they can be dependent or independent of the increase in sales. Variable costs, 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 proper organization of the activities of any enterprise.
general characteristics
Variable Costs of the company (Variable Cost, VC) are those costs of the organization that change with increasing or decreasing growth in sales of manufactured products.
For example, when a company ceases to operate, the variable costs should be zero. To carry out its activities efficiently, an enterprise will need to regularly evaluate its cost indicator. After all, it is they that affect the size of the cost of finished products and turnover.
Variable costs include such items.
- The book value of raw materials, energy, 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.
- Interest on sales managers.
- Taxes: VAT, tax on the simplified tax system, unified social tax.
Understanding Variable Costs
To correctly understand such a thing as variable costs, an example of their definition should be considered in more detail. So, production in the process of implementing its production programs spends a certain amount of materials from which the final product will be made.
These costs can be attributed to variable direct costs. But some of them should be shared. A factor such as electricity can be attributed to fixed costs. If the costs of coverage of the territory are taken into account, then they should be assigned to this category. Electricity, which is directly involved in the manufacturing process, refers to variable costs in the short term.
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, mismatch of its design capacity.
Therefore, in order to measure the effectiveness of the enterprise in the field of managing its costs, it is necessary to consider variable costs as obeying a linear schedule on a segment of normal production capacity.
Classification
There are several types of variable cost classifications. With the change in costs from the implementation distinguish:
- proportional costs, which increase in the same way as the volume of production;
- progressive costs increasing at a faster rate than sales;
- degressive costs, which increase with the rate of production increase at a lower rate.
According to statistics, the variable costs of the company can be:
- General (Total Variable Cost, TVC), which are calculated for the entire product range;
- average (AVC, Average Variable Cost), calculated per unit of product.
According to the method of accounting for the cost of finished products, direct costs are distinguished: direct (they are simply attributed to cost) and indirect (difficult to measure their contribution to cost).
Regarding the technological production output, they can be production (fuel, raw materials, energy, etc.) and non-production (transportation, interest to an intermediary, etc.).
Total variable costs
The function of output is similar to variable costs. It is continuous. When, for analysis, all costs are brought together, the total variable costs for all products of one enterprise are obtained.
When common variables and fixed costs are combined, their total amount is obtained at the enterprise. This calculation is carried out in order to identify the dependence of variable costs on the volume of production. Further, according to the formula, variable marginal costs are found:
MS = ΔVC / ΔQ, where:
- MC - marginal variable costs;
- 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 sales.
Calculation of average costs
Average variable costs (AVC) are the resources spent on a unit of a company. In a certain range, production growth has no effect on them. But when they reach rated power, 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 - the number of manufactured products.
In terms of measurement parameters, average variable costs in the short term are similar to changes in average total costs. The greater the output of finished products, the greater the total costs begin to correspond to the growth of variable costs.
Variable Cost Calculation
Based on the foregoing, it is possible to determine the formula for variable costs (VC):
- VC = Costs of materials + Raw materials + Fuel + Electricity + Premium salary + Interest on sales to agents.
- VC = Gross margin - fixed costs.
The sum of the variable and fixed costs is equal to the total cost of the organization.
Variable costs, the calculation example of which was presented above, participate in the formation of their overall indicator:
Total costs = Variable costs + Fixed costs.
Definition Example
To better understand the principle of calculating variable costs, you should consider an example from the calculations. For example, a company characterizes its output with the following items:
- The cost of materials and raw materials.
- Energy costs of production.
- Salary of workers manufacturing products.
It is argued that variable costs increase in direct proportion to the increase in sales of finished products. This fact is taken into account to determine the breakeven point.
For example, it was calculated that the breakeven point was 30 thousand units. If you build a graph, the breakeven level will be zero. If the volume is reduced, the company's activities will move to the plane of loss. And similarly, with an increase in production volumes, the organization will be able to get a positive net profit result.
