Variable Costs: An Example. Types of production costs

The costs of the enterprise can be considered inanalysis 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 increased sales. Variable costs, an example of which requires careful consideration, allow a company manager 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 cost of the company (Variable Cost, VC) are such costs of an organization that change with an increase or decrease in the growth of sales of manufactured products.

For example, when terminating a company,variable costs must be zero. An enterprise, in order to carry out its activities efficiently, will need to regularly evaluate its cost index. After all, they 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.
• The percentage of the activities of sales managers.
• Taxes: VAT, tax on USN, UST.

Understanding variable costs

To properly understand such a thing asvariable costs, an example of their definition should be considered in more detail. Thus, production in the process of implementing its production programs spends a certain amount of materials from which the final product will be made.

Эти затраты можно отнести к переменным прямым costs. But some of them should be divided. A factor such as electricity can be attributed to fixed costs. If the costs of lighting the territory are taken into account, they should be attributed to this category. Electricity, directly involved in the process of manufacturing products, in the short term to variable costs.

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

Therefore, to measure the effectivenessenterprise activities in the management of their costs, should be considered variable costs as obeying a linear schedule on the segment of normal production capacity.

Classification

There are several types of variable cost classifications. With the change in costs from the implementation of distinguished:

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

According to statistics statistics, the variable costs of a firm 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 in the cost of finished products distinguish variable costs direct (they are simply attributed to the cost) and indirect (it is difficult to measure their contribution to the cost).

Regarding the technological output, they can be production (fuel, raw materials, energy, etc.) and non-production (transportation, interest to the intermediary, etc.).

Total variable costs

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

When common variables and constants are combinedcosts, it turns out their total amount in the enterprise. This calculation is carried out in order to reveal the dependence of variable costs on the volume of production. Further, according to the formula, the variable marginal costs are found:

MS = ΔVC / ΔQ, where:

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

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

Calculation of average costs

Average variable costs (AVC) isspent on a unit of production resources of the company. In a certain range, the growth of production has no effect on them. But when they reach the estimated capacity, 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 figure is calculated as follows:

AVC = VC / Q, where:

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

Measurement parameters average variablescosts in the short run are similar to changes in average total costs. The greater the output of finished products, the more the total costs begin to correspond to the growth of variable costs.

Calculation of variable costs

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

• VC = Cost of materials + Raw materials + Fuel + Electricity + Bonus salary + Percentage of sales to agents.
• VC = Gross profit - fixed costs.

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

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

Total Costs = Variable Costs + Fixed Costs.

Definition example

To gain a deeper understanding of the principle of calculating variable costs, consider an example from 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 producing products.

It is argued that variable costs increase 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 pointbreak-even amounted to 30 thousand units. If you build a graph, the level of break-even production will be zero. If the volume is reduced, the company's activity will move to the plane of loss. And similarly, with an increase in production volumes, an organization will be able to get a positive result of net profit.

How to reduce variable costs

To increase the efficiency of the enterprise can use the strategy of "economies of scale", which manifests itself with increasing production volumes.

The reasons for its appearance is the following.

1. Using the achievements of science and technology, research, which improves the manufacturability of production.
2. Reducing the salary costs of managers.
3. Narrow specialization of production that allows you to perform each stage of production tasks with higher quality. This reduces the percentage of marriage.
4. The introduction of technologically similar production lines that 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.

Familiarized with the concept of variablesCosts, an example of the calculation of which was given in this article, financial analysts and managers can develop a number of ways to reduce the total production costs and reduce production costs. This will provide an opportunity to effectively manage the rate of turnover of the company's products.