Constant and variable costs: examples. Example of variable costs

Each enterprise has certain costs in the course of its activities. There are different cost classifications. One of them provides for the division of costs into fixed and variable costs.

The concept of variable costs

Variable costs are those costs that are directly proportional to the volume of products and services produced. If the enterprise produces bakery products, then, as an example of the variable costs for such an enterprise, the consumption of flour, salt, and yeast can be cited. These costs will grow in proportion to the growth in the volume of bakery products produced.

One item of costs can relate to both variable and fixed costs. Thus, the electricity costs for production ovens, where bread is baked, will serve as an example of variable costs. And the cost of electricity for lighting a production building is a constant cost.

There is also such a thing as conditional variable costs. They are related to the volume of production, but to a certain extent. With a small level of production, some costs still do not decrease. If the production furnace is half charged, then the electric power is consumed as much as the full furnace. That is, in this case, with a decrease in production costs do not decrease. But with the increase in output above a certain value, costs will increase.

The main types of variable costs

We give examples of enterprise variable costs:

• Salary of employees, which depends on the volume of products produced by them. For example, in bakery production, a baker, a packer, if they have piecework wages. And also here you can include premiums and rewards for sales professionals for specific volumes of products sold.
• The cost of raw materials, materials. In our example - this flour, yeast, sugar, salt, raisins, eggs, etc., packaging materials, bags, boxes, labels.
• An example of variable costs is the cost of fuel and electricity, which is expended on the production process. It can be natural gas, gasoline. Everything depends on the specifics of the specific production.
• Another typical example of variable costs are taxes paid on the basis of production volumes. These are excises, taxes for UST (Unified Social Tax), USN (Simplified taxation system).
• Another example of variable costs is the payment for services of other companies, if the volume of use of these services is related to the level of production of the organization. It can be transport companies, intermediary firms.

Variable costs are divided into direct and indirect costs

This division exists because different variable costs are included in the price of the goods differently.

Direct costs are immediately included in the cost of the goods.

Indirect costs are allocated to the entire volume of goods produced in accordance with a certain base.

Average variable costs

This indicator is calculated by dividing all variable costs by the volume of production. Average variable costs can both decrease and increase as output increases.

Let's consider an example of average variable costs at a bakery enterprise. Variable costs for the month amounted to 4600 rubles, produced 212 tons. Thus, the average variable costs will amount to 21.70 rubles per ton.

The concept and structure of fixed costs

They can not be reduced in a short time. With a reduction or growth in output, these costs will not change.

To constant production costs usually include the following:

• Rent for premises, shops, warehouses;
• Payment for utilities;
• Salary of the administration;
• Costs for fuel and energy resources, which are not consumed by production equipment, but for lighting, heating, transport, etc.;
• Advertising costs;
• Payment of interest on bank loans;
• Purchase of stationery, paper;
• Costs for drinking water, tea, coffee for employees of the organization.

Gross Costs

All of the above examples of fixed and variable costs in total are gross, that is, the total costs of the organization. As production volumes increase, gross costs increase in terms of variable costs.

All costs, in fact, represent payments for purchased resources - labor, materials, fuel, etc. The indicator of profitability is calculated using the sum of fixed and variable costs. An example of calculating the profitability of the main activity: the profit divided by the amount of costs. Profitability shows the effectiveness of the organization. The higher the profitability, the better the organization works. If the profitability is below zero, then the expenses exceed the revenues, that is, the activity of the organization is ineffective.

Cost management in the enterprise

It is important to understand the essence of variables and fixed costs. With the proper management of costs in the enterprise, their level can be reduced and a greater profit can be obtained. Constant costs are almost impossible to reduce, so effective work to reduce costs can be carried out in terms of variable costs.

How you can reduce the cost of the enterprise

In each organization the work is built differently, but basically there are the following directions of cost reduction:

1. Reduction of labor costs. It is necessary to consider the issue of optimizing the number of employees, tightening production standards. Some employee can be reduced, and his duties divided among the others with the implementation of surcharge for additional work. If the enterprise grows production volumes and there is a need to hire additional people, it is possible to go by reviewing production standards and expanding service areas or increasing the scope of work for old employees.

2. Raw materials and materials are an important part of variable costs. Examples of their reduction may be as follows:

• Search for other suppliers or changing the terms of supply of old suppliers;
• Introduction of modern economical resource-saving processes, technologies, equipment;

• Termination of the use of expensive raw materials or materials or their replacement by cheap analogs;
• Realization of joint purchases of raw materials with other buyers from one supplier;
• Independent production of some components used in production.

3. Reduction of production costs.

This can be the selection of other options for rental payments, the lease of areas in the sublease.

Also here is savings on utility bills, for which it is necessary to carefully use electricity, water, heat.

Savings on the repair and maintenance of equipment, vehicles, premises, buildings. It is necessary to consider whether it is possible to postpone repair or maintenance, whether it is possible to find new contractors for these purposes, or to do it yourself cheaper.

It is also necessary to pay attention to the fact that it is more profitable and more economical to narrow production, to transfer some side functions to another manufacturer. Or vice versa, to enlarge production and carry out some functions independently, refusing to cooperate with subcontractors.

Other areas of cost reduction can be organization transportation, advertising activities, reducing the tax burden, paying off debts.

Any enterprise must consider its costs. Work to reduce them will bring more profit and increase the effectiveness of the organization.