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Costs are usually divided into fixed and variable costs. Fixed costs are those costs that do not depend on the volume of production and sales, they are unchanged, and do not constitute the direct cost of products, goods, services. Variable costs are costs that constitute the direct cost of production, and their size directly depends on the volume of production and sales of products, goods or services. Fixed and variable costs, examples of them are very diverse, they depend on the types and areas of activity. Today we will try to present fixed and variable costs in more detail through examples.
Fixed costs include the following types:
Rent. Most shining example fixed costs, which occurs in any form entrepreneurial activity are rental payments. An entrepreneur, renting an office, workshop, warehouse, is forced to pay regular rental payments, regardless of how much he earned, sold goods or provided services. Even if he has not received a single ruble of income, he will still have to pay the rental price, otherwise the contract with him will be terminated and he will lose the rented space.
wage administrative personnel, management, accounting, remuneration of support staff (system administrator, secretary, repair service, cleaner, etc.). The calculation and payment of such wages also does not depend in any way on sales volumes. This also includes the salary portion of sales managers, which is accrued and paid regardless of the sales manager’s performance.
The percentage or bonus part will be classified as variable costs, since it directly depends on volumes and sales results. Examples of fixed costs include the salary portion of the wages of the main workers, which is paid regardless of the volume of products produced, or payments for forced downtime.
depreciation deductions. Accrued depreciation amounts are also a classic example of fixed costs.
payment for services related to the general management of the enterprise. This includes utility costs: payment for electricity, water, communication services and the Internet. Services of security organizations, bank services (cash and settlement services) are also examples of fixed expenses. Advertising agency services.
bank interest, interest on loans, discounts on bills.
tax payments, the tax base of which is static taxation objects: land tax, enterprise property tax, unified social tax paid on wages accrued on salaries, UTII is a very good example of fixed costs, various payments and fees for permitting trade, environmental fees, transport tax.
Examples variable costs, related to the volume of production, sales of goods and services, it is not difficult to imagine, these include:
Piecework wages for workers, the amount of which depends on the amount of products produced or services provided.
the cost of raw materials, materials and components used to produce products, the cost of purchased goods for subsequent resale.
the amount of interest paid to sales managers from the results of sales of goods, the amount of bonuses accrued to personnel based on the results of the enterprise’s activities.
amounts of taxes, the tax base of which is the volume of production and sales of products, goods: excise taxes, VAT, tax under the simplified tax system, unified social tax, paid on accrued premiums, interest on sales results.
the cost of services of third-party organizations, paid depending on sales volumes: services of transport companies for the transportation of products, services of intermediary organizations in the form of agency or commission fees, sales outsourcing services,
the cost of electricity, fuel, in manufacturing enterprises. These costs also depend on the volume of production or provision of services, the cost of electricity used in an office or administrative building, as well as the cost of fuel for cars used in administrative purposes, refer to fixed costs.
As we have already said, knowledge and understanding of the essence of fixed and variable costs is very important for competent management of a business and its profitability. Due to the fact that fixed costs do not depend on the volume of production and sales of goods, they are a certain burden for the entrepreneur. After all, the higher the fixed costs, the higher the break-even point, and this in turn increases the risks of the entrepreneur, since in order to cover the amount of large fixed costs, the entrepreneur must have a large volume of sales of products, goods or services. However, in conditions of fierce competition, it is very difficult to guarantee the constancy of the occupied market segment. This is achieved by increasing advertising and promotion costs, which are also fixed costs. It turns out vicious circle. By increasing expenses on advertising and promotion, we thereby increase fixed costs, while at the same time we stimulate sales volume. The main thing here is that the efforts of the entrepreneur in the field of advertising are effective, otherwise the entrepreneur will suffer a loss.
This is especially important for small businesses, since the margin of safety of a small business entrepreneur is low, he has limited access to many financial instruments (credits, loans, third-party investors), especially for a novice entrepreneur who is just trying to grow his business. Therefore, for small businesses you should try to use low budget ways business promotions such as guerrilla marketing, non-standard advertising. It is necessary to try to reduce the level of fixed costs, especially for initial stage development.
In the activities of any enterprise, making the right management decisions is based on an analysis of its performance indicators. One of the objectives of such analysis is to reduce production costs, and, consequently, increase business profitability.
Fixed and variable costs and their accounting are an integral part of not only calculating product costs, but also analyzing the success of the enterprise as a whole.
Correct analysis of these articles allows you to take effective management decisions that have a significant impact on profits. For analysis purposes in computer programs at enterprises it is convenient to provide for automatic allocation of costs into fixed and variable based on primary documents, in accordance with the principle adopted in the organization. This information is very important for determining the “break-even point” of a business, as well as assessing the profitability of various types of products.
Variable costs
To variable costs These include costs that are constant per unit of production, but their total amount is proportional to the volume of output. These include the costs of raw materials, Consumables, energy resources involved in the main production, salaries of the main production personnel (together with accruals) and cost transport services. These costs are directly included in the cost of production. In monetary terms, variable costs change when the price of goods or services changes. Specific variable costs, for example, for raw materials in physical dimension, can be reduced with an increase in production volumes due, for example, to a reduction in losses or costs for energy resources and transport.
Variable costs can be direct or indirect. If, for example, an enterprise produces bread, then the costs of flour are direct variable costs, which increase in direct proportion to the volume of bread production. Direct variable costs may decrease with the improvement of the technological process and the introduction of new technologies. However, if a plant processes oil and as a result receives one technological process, for example, gasoline, ethylene and fuel oil, then the cost of oil for the production of ethylene will be variable, but indirect. Indirect variable costs in this case, they are usually taken into account in proportion to the physical volumes of production. So, for example, if when processing 100 tons of oil, 50 tons of gasoline, 20 tons of fuel oil and 20 tons of ethylene are obtained (10 tons are losses or waste), then the cost of producing one ton of ethylene is 1.111 tons of oil (20 tons of ethylene + 2.22 tons of waste /20 t ethylene). This is due to the fact that, when calculated proportionally, 20 tons of ethylene produce 2.22 tons of waste. But sometimes all waste is attributed to one product. Data from technological regulations are used for calculations, and actual results for the previous period are used for analysis.
The division into direct and indirect variable costs is arbitrary and depends on the nature of the business.
Thus, the cost of gasoline for transporting raw materials during oil refining is indirect, and for transport company direct, since they are directly proportional to the volume of transportation. Wages of production personnel with accruals are classified as variable costs when piecework payment labor. However, with time-based wages, these costs are conditionally variable. When calculating the cost of production, planned costs per unit of production are used, and when analyzing actual costs, which may differ from planned costs, both upward and downward. Depreciation of fixed assets of production per unit of production volume is also a variable cost. But this relative value is used only when calculating the cost of various types of products, since depreciation charges, in themselves, are fixed costs/expenses.
Any company operates to generate income, and its work is impossible without money spent. Exist different kinds such expenses. There are types of activities that require constant financial investments. But some of the costs are not regular, and their impact on the progress of the product and its sales must also be taken into account.
So, the main point of any company is to release a product and generate income from it. To start this activity, you first need to purchase raw materials, production tools, and hire labor. Certain funds are spent on this; in economics they are called costs.
People invest in production activities for a variety of purposes. In accordance with this, a classification of expenses was adopted. Cost categories (depending on properties):
- Explicit. Such costs are incurred directly for the payment of wages to employees, commissions to other organizations, payment for the activities of banks and transport.
- Implicit. Costs for the needs of company managers that are not specified in contracts.
- Permanent. Means that ensure continuous production processes.
- Variables. Costs that can be easily adjusted while maintaining the same level of product output.
- Non-refundable. Expenses of movable assets that are invested in the company's activities free of charge. Characteristic of the initial period of production or re-profiling of an organization. These funds can no longer be spent on other organizations.
- Average. Costs obtained during calculations that characterize investments in each unit of product. This indicator contributes to the pricing of the product.
- Limit. This greatest value costs that are not subject to increase due to the low efficiency of capital investments in the company.
- Appeals. Costs of delivering goods from manufacturer to consumer.
Application of fixed and variable costs
Let's consider the differences between fixed costs and variable costs and their economic characteristics.
The first type of costs (fixed) designed for investment in the manufacture of a product in a separate production cycle. In each organization, their size is individual, so the enterprise considers them separately, taking into account the analysis of the release process. Please note that such costs will not differ from the initial production stage to the sale of products to the consumer.
Second type of costs (variables) changes in each production cycle, with virtually no repetitions of this indicator.
The two types of costs together make up the total costs, which are calculated at the end of the production process.
Simply put, fixed costs - those that remain unchanged over a certain period of time. What can be attributed to them?
- Payment of utilities;
- Costs of operating premises;
- Payment of rent;
- Salaries of staff;
It must be taken into account that the constant level of total costs used in a specific time period of production, during one cycle, applies only to total number units of goods produced. If such costs are calculated for each unit, their size will decrease in accordance with the increase in output. This fact applies to all types of production.
Variable costs are proportional to the changing quantity or volume of goods produced. These include:
- Energy costs;
- Material costs;
- Negotiated wages.
This type of cost is closely related to the volume of product output, as a result of which it changes according to the production indicators of this product.
Examples of costs:
Each production cycle corresponds to a specific amount of costs that remain unchanged under any conditions. There are other costs that depend on production resources. As was previously established, costs over a short period of time can be variable or constant.
Such characteristics are not suitable for a long time, because the costs will vary in this case.
Examples of fixed costs
Fixed costs remain at the same level for any volume of product output, in a short time period. These are costs for the company's stable factors that are not proportional to the number of units of the product. Examples of such expenses are:
- payment of interest on a bank loan;
- depreciation expenses;
- payment of interest on bonds;
- salaries for managers at the enterprise;
- insurance costs.
All costs independent of the production of a product, which are constant in a short period of the production cycle, can be called constant.
Variable Cost Examples
Variable costs, on the contrary, are essentially investments in the production of goods, and therefore depend on its volume. The amount of investment is directly proportional to the quantity of goods produced. Examples could include costs for:
- for raw material reserves;
- payment of bonuses to employees producing products;
- delivery of materials and the product itself;
- energetic resources;
- equipment;
- other expenses for the production of goods or provision of services.
Consider the variable cost graph, which is a curve. (Figure 1.)
Fig. 1 - graph of variable costs
The path of this line from the origin to point A depicts the increase in costs as the quantity of goods produced increases. Section AB: more rapid increase in costs in conditions of mass production. Variable costs may be affected by disproportionate costs for transport services or consumables, improper use of released goods with reduced demand for them.
Example of calculating production costs:
Let's consider the calculation of fixed and variable costs for specific example. Let's say a shoe company produces 2,000 pairs of boots per year. During this time, the factory spends funds on the following needs:
- rent – 25,000 rub.;
- interest on a bank loan - 11,000 rubles;
- payment for the production of one pair of shoes - 20 rubles;
- raw materials for the production of a pair of boots - 12 rubles.
Our task: to calculate variable, fixed costs, as well as the funds spent on each pair of shoes.
Fixed costs in in this case You can only name rent and loan payments. Such expenses are unchangeable, depending on production volumes, so they are easy to calculate: 25,000 + 11,000 = 36,000 rubles.
The cost of producing one pair of shoes is variable costs: 20+12=32 rubles.
Consequently, annual variable costs are calculated as follows: 2000 * 32 = 64,000 rubles.
General costs– this is the sum of variables and constants: 36000+64000=100000 rubles.
Average total cost per pair of shoes: 100,000/20=50
Production cost planning
It is important for each company to correctly calculate, plan and analyze production costs.
In the process of cost analysis, options for the economical use of finances are considered, which are invested in production and must be distributed correctly. This leads to a reduction in production costs, and hence the final price of the manufactured product, as well as an increase in the company’s competitiveness and an increase in its income.
The task of each company is to save as much as possible on production and optimize this process so that the enterprise develops and becomes more successful. As a result of these measures, the profitability of the organization increases, which means there are more opportunities to invest in it.
To plan production costs, you need to take into account their sizes in previous cycles. In accordance with the volume of goods produced, a decision is made to reduce or increase production costs.
Balance Sheet and Costs
Among the accounting documentation of each company there is a “Profit and Loss Statement”. All information about expenses is recorded there.
A little more about this document. This report does not characterize the property status of the enterprise in general, but provides information about its activities for the selected time period. In accordance with OKUD, the profit and loss statement has form 2. In it, income and expense indicators are recorded progressively from the beginning to the end of the year. The report includes a table in which line 020 displays the organization's main expenses, line 029 shows the difference between profit and costs, line 040 shows expenses included in account 26. The latter represent travel costs, payment for premises and labor protection, and employee benefits. Line 070 shows the company's interest on loan obligations.
The initial calculation results (when reporting) are divided into direct and indirect costs. If we consider these indicators separately, then direct costs can be considered fixed costs, and indirect costs - variable.
The balance sheet does not record costs directly; it only shows the assets and financial liabilities of the business.
Accounting costs (otherwise known as explicit costs)- This is payment in monetary terms for any transactions. They have close connection with the economic costs and income of the company. Let's subtract explicit costs from the company's profit, and if we get zero, then the organization has used its resources in the most correct way.
Example of cost calculation
Let's consider an example of calculating accounting and economic costs and profits. The owner of a recently opened laundry planned to receive an income of 120,000 rubles a year. To do this, he will have to cover the costs:
- rental of premises - 30,000 rubles;
- salary for administrators - 20,000 rubles;
- purchase of equipment - 60,000 rubles;
- other small expenses - 15,000 rubles;
Loan payments – 30%, deposit – 25%.
The head of the enterprise purchased the equipment at his own expense. Washing machines subject to breakdown after some time. Taking this into account, you need to create a depreciation fund, into which 6,000 rubles will be transferred every year. All of the above are obvious expenses. Economic costs– possible profit for the laundry owner if a deposit is purchased. To pay the initial expenses he will have to use bank loan. Loan in the amount of 45,000 rubles. will cost him 13,500 rubles.
Thus, we calculate the explicit costs: 30+2*20+6+15+13.5=104.5 thousand rubles. Implicit (deposit interest): 60*0.25=15 thousand rubles.
Accounting income: 120-104.5=15.5 thousand rubles.
Economic income: 15.5-15=0.5 thousand rubles.
Accounting and economic costs differ from each other, but they are usually considered together.
The value of production costs
Production costs form the law of economic demand: with an increase in the price of a product, its level increases. market supply, and with a decrease, supply also decreases, while other conditions remain the same. The essence of the law is that every manufacturer wants to offer maximum amount goods at the highest price, which is most profitable.
For the buyer, the cost of the product is a limiting factor. The high price of a product forces the consumer to buy less of it; and accordingly, cheaper products are purchased in larger volumes. The manufacturer receives a profit for the released product, so he strives to produce it in order to acquire revenue from each unit of the product, in the form of its price.
What is the main role of production costs? Let's consider it using the example of a manufacturing industrial enterprise. Over a certain period of time, production costs increase. To compensate for them, you need to raise the price of the product. The increase in costs is due to the fact that it is impossible to quickly expand the production area. The equipment is overloaded, which reduces the efficiency of the enterprise. Thus, to produce a product at the highest cost, the firm must set a higher price for it. Price and supply level are directly related.
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 shown 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 Reducing 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 materials). 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 expenses, we came up with the following relationship: an increase in revenue will lead to a significant greater increase 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 the economic activity of an enterprise expands, 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. In addition, this grouping of costs is used in the analysis and forecasting of 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
| Cost type | Composition of costs |
| direct variables | raw materials and basic materials, wages of production workers with accruals for it, etc. These are expenses that, based on primary accounting data, can be attributed directly to the cost of specific products. |
| indirect variables | such expenses that are directly dependent or almost directly dependent on changes in the volume of activity, but due to the technological features of production they cannot or are not economically feasible to be directly attributed to the manufactured products. Representatives of such costs are the costs of raw materials in complex production. For example, when processing raw materials - coal– coke, gas, benzene, coal tar, ammonia are produced. It is possible to divide the costs of raw materials by type of product in these examples only indirectly. |
| constant indirect | overhead costs that do not change or change little as a result of changes in production volume. For example, depreciation of industrial buildings, structures, equipment; expenses for their repair and operation; expenses for maintaining the workshop management apparatus and other workshop personnel. This group of costs in accounting is traditionally distributed among types of products indirectly in proportion to some distribution base. |
Related information.
Lecture:
Fixed and variable costs
The success of entrepreneurial activity (business) is determined by the amount of profit, which is calculated using the formula: revenue – costs = profit .
What expenses must a manufacturer bear in order to create a product or service? This:
- costs of raw materials and materials;
- expenses for utilities, transport and other services;
- payment of taxes, insurance premiums, loan interest;
- payment of salaries to employees;
- depreciation deductions.
Costs are otherwise called production costs. They are constant and variable. The firm's fixed and variable costs for the production and sale of a unit of goods are its cost price, which is expressed in monetary terms.
Fixed costs- these are costs that do not depend on the volume of output, that is, expenses that the manufacturer is forced to make even if his income does not amount to even a ruble.
These include:
- rental payments;
- taxes;
- interest on loans;
- insurance payments;
- utility costs;
- salaries of management personnel (administrators, salaries of managers, accountants, etc.);
- depreciation charges (costs of replacing or repairing worn-out equipment).
Variable costs – these are costs, the value of which depends on the volume of products produced.
Among them:
- costs of raw materials and materials;
- fuel costs;
- payment for electricity;
- piecework wages for hired workers;
- expenses for transport services;
- costs for containers and packaging.
External and internal costs
Fixed and variable costs are reflected in the company's financial statements and are therefore external. But when analyzing the profitability of an enterprise, the manufacturer also takes into account internal or hidden costs associated with the resources actually used. For example, Andrey opened a store in his premises and works in it himself. He uses his own premises and his own labor, and the monthly income from the store is 20,000 rubles. Andrey can use these same resources in an alternative way. For example, renting out a room for 10,000 rubles. per month and got a job as a manager in a large company for a fee of 15,000 rubles. We see a difference in income of 5,000 rubles. These are internal costs - money that the manufacturer sacrifices. Analysis of internal costs will help Andrey use own resources more profitable.
Additional materials for the lesson :
Social studies mind map No. 23
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