The level of variable costs per unit of output. Fixed and variable costs

Consider the variable costs of the enterprise, what they include, how they are calculated and determined in practice, consider the methods for analyzing the variable costs of the enterprise, the effect of changing variable costs with different production volumes and their economic meaning. In order to understand all this simply, at the end, an example of variable cost analysis based on the break-even point model is analyzed.

Variable costs of the enterprise. Definition and their economic meaning

Enterprise variable costs (Englishvariablecost,VC) are the costs of the enterprise/company, which vary depending on the volume of production/sales. All costs of the enterprise can be divided into two types: variable and fixed. Their main difference lies in the fact that some change with an increase in production, while others do not. If the production activity of the company stops, then variable costs disappear and become equal to zero.

Variable costs include:

• The cost of raw materials, materials, fuel, electricity and other resources involved in production activities.
• The cost of manufactured products.
• Wages of working personnel (part of the salary depending on the fulfilled norms).
• Percentage of sales to sales managers and other bonuses. Interest paid to outsourcing companies.
• Taxes that have a tax base of the size of sales and sales: excises, VAT, UST from premiums, tax on the simplified tax system.

What is the purpose of calculating enterprise variable costs?

Behind any economic indicator, coefficient and concept one should see their economic meaning and the purpose of their use. If we talk about the economic goals of any enterprise / company, then there are only two of them: either an increase in income or a decrease in costs. If we generalize these two goals into one indicator, we get - the profitability / profitability of the enterprise. The higher the profitability of an enterprise, the greater its financial reliability, the greater the ability to attract additional borrowed capital, expand its production and technical capacities, increase its intellectual capital, increase its market value and investment attractiveness.

The classification of enterprise costs into fixed and variable is used for management accounting, and not for accounting. As a result, there is no such stock as "variable costs" in the balance sheet.

Determining the amount of variable costs in the overall structure of all costs of the enterprise allows you to analyze and consider various management strategies to increase the profitability of the enterprise.

Amendments to the definition of variable costs

When we introduced the definition of variable costs / costs, we were based on a model of linear dependence of variable costs and production volume. In practice, often variable costs do not always depend on the size of sales and output, therefore they are called conditionally variable (for example, the introduction of automation of a part of production functions and, as a result, a decrease in wages for the production rate of production personnel).

The situation is similar with fixed costs, in reality they are also conditionally fixed, and can change with the growth of production (an increase in rent for production premises, a change in the number of personnel and a consequence of the volume of wages. You can read more about fixed costs in detail in my article: "".

Classification of enterprise variable costs

In order to better understand how to understand what variable costs are, consider the classification of variable costs according to various criteria:

Depending on the size of sales and production:

• proportionate costs. Elasticity coefficient =1. Variable costs increase in direct proportion to the increase in output. For example, the volume of production increased by 30% and the amount of costs also increased by 30%.
• Progressive costs (similar to progressive variable costs). Elasticity coefficient >1. Variable costs are highly sensitive to changes depending on the size of output. That is, variable costs increase relatively more with output. For example, the volume of production increased by 30%, and the amount of costs by 50%.
• Degressive costs (similar to regressive variable costs). Elasticity coefficient< 1. При увеличении роста производства переменные издержки предприятия уменьшаются. Данный эффект получил название – «эффект масштаба» или «эффект массового производства». Так, например, объем производства вырос на 30%, а при этом размер переменных издержек увеличился только на 15%.

The table shows an example of changing the volume of production and the size of variable costs for their various types.

According to the statistical indicator, there are:

• General variable costs ( EnglishTotalvariablecost,TVC) - will include the totality of all variable costs of the enterprise for the entire range of products.
• Average variable costs (English AVC, Averagevariablecost) - average variable costs per unit of production or group of goods.

According to the method of financial accounting and attribution to the cost of manufactured products:

• Variable direct costs are costs that can be attributed to the cost of production. Everything is simple here, these are the costs of materials, fuel, energy, wages, etc.
• Variable indirect costs are costs that depend on the volume of production and it is difficult to assess their contribution to the cost of production. For example, during the production separation of milk into skimmed milk and cream. It is problematic to determine the amount of costs in the cost of skimmed milk and cream.

In relation to the production process:

• Production variable costs - the cost of raw materials, materials, fuel, energy, wages of workers, etc.
• Non-manufacturing variable costs - costs not directly related to production: selling and management costs, for example: transportation costs, commission to an intermediary / agent.

Variable Cost/Cost Formula

As a result, you can write a formula for calculating variable costs:

Variable costs = Cost of raw materials + Materials + Electricity + Fuel + Bonus part of Salary + Percentage of sales to agents;

variable costs\u003d Marginal (gross) profit - Fixed costs;

The totality of variable and fixed costs and constants make up the total costs of the enterprise.

General costs= Fixed costs + Variable costs.

The figure shows a graphical relationship between the costs of the enterprise.

How to reduce variable costs?

One strategy to reduce variable costs is to use economies of scale. With an increase in the volume of production and the transition from serial to mass production, economies of scale appear.

scale effect graph shows that with an increase in production, a turning point is reached, when the relationship between the size of costs and the volume of production becomes non-linear.

At the same time, the rate of change of variable costs is lower than the growth of production/sales. Consider the causes of the "scale effect of production":

1. Reducing the cost of management personnel.
2. The use of R&D in the production of products. An increase in output and sales leads to the possibility of carrying out expensive research and development work to improve production technology.
3. Narrow product specialization. Focusing the entire production complex on a number of tasks can improve their quality and reduce the amount of scrap.
4. Release of products similar in the technological chain, additional capacity utilization.

Variable costs and the break-even point. Calculation example in Excel

Consider the break-even point model and the role of variable costs. The figure below shows the relationship between changes in production volume and the size of variable, fixed and total costs. Variable costs are included in total costs and directly determine the break-even point. More

When the enterprise reaches a certain volume of production, an equilibrium point occurs at which the amount of profit and loss is the same, net profit is zero, and marginal profit is equal to fixed costs. This point is called breakeven point, and it shows the minimum critical level of production at which the enterprise is profitable. In the figure and the calculation table below, it is achieved by producing and selling 8 units. products.

The task of the enterprise is to create security zone and ensure that the level of sales and production that would ensure the maximum distance from the break-even point. The further the company is from the break-even point, the higher the level of its financial stability, competitiveness and profitability.

Consider an example of what happens to the break-even point as variable costs increase. The table below shows an example of a change in all indicators of income and expenses of the enterprise.

As variable costs increase, the break-even point shifts. The figure below shows a schedule for reaching the break-even point in a situation where the variable costs for the production of one unit of the product became not 50 rubles, but 60 rubles. As we can see, the break-even point began to equal 16 units of sales / sales, or 960 rubles. income.

This model, as a rule, operates with linear dependencies between the volume of production and income/costs. In real practice, dependencies are often non-linear. This arises due to the fact that the volume of production / sales is affected by: technology, seasonality of demand, the influence of competitors, macroeconomic indicators, taxes, subsidies, economies of scale, etc. To ensure the accuracy of the model, it should be used in the short term for products with stable demand (consumption).

Summary

In this article, we examined various aspects of the variable costs / costs of the enterprise, what forms them, what types of them exist, how changes in variable costs and changes in the break-even point are related. Variable costs are the most important indicator of the enterprise in management accounting, for creating planned targets for departments and managers to find ways to reduce their weight in total costs. To reduce variable costs, you can increase the specialization of production; expand the range of products using the same production facilities; increase the share of research and production developments to improve the efficiency and quality of output.

They are divided into variables and constants. Their main difference is that some change with an increase in production volume, while others do not. However, fixed and variable costs include costs related to the production and sale of products. With the termination of production activities, part of the costs disappears and becomes equal to zero. Consider what variable costs include. An example of costs will also be given in the article.

Composition of expenses

Variable costs include:

1. Commercial expenses (percentage of sales to sales managers and other remuneration, as well as % that are paid to outsourcing companies).
2. Cost of goods produced.
3. Salary of working personnel (part of the salary, which depends on the standards met).
4. The cost of fuel, raw materials, materials, electricity and other resources involved in production activities.

Variable costs also include some taxes: VAT, excises, deductions for the simplified tax system, UST from premiums.

Purpose of calculation

Behind each coefficient, indicator or concept, it is necessary to see their economic meaning. If we talk about the goals of the enterprise, then, in general, there are two of them: reducing costs or increasing income. When generalizing these concepts, the profitability (profitability) of the company arises. The higher this indicator is, the more stable the financial position of the company will be, there will be more opportunities to attract additional borrowed funds, expand technical and production capacities. The enterprise in this case can increase its own value in the market, enhance investment attractiveness. Separation is used in management accounting. Company managers need to know what variable costs include. The line on which this group of expenses is reflected is not in the financial statements. Determining the magnitude of these costs in the overall structure allows you to analyze the company's activities. Management, knowing what the variable costs include, the balance of expenses and income gets the opportunity to consider different management strategies to increase the profitability of the company.

Production and sales volume

To better understand what variable costs include, you should consider their division depending on certain features. According to the volume of production and sales, there are:

How to reduce costs?

One of the options for reducing variable costs is the use of "scale effects". It appears with an increase in production volume and the transition from serial to mass production of products. The graph shows that as output increases, a certain point is reached. In it, the relationship between the amount of costs and production volume becomes non-linear. At the same time, the rate at which the change in variable costs occurs is lower than the intensity of growth in the output/sales of goods. Reasons for this effect include:

Static indicator

On this basis, the costs are divided into:

1. General.
2. Medium.

Total variable costs include all costs related to this category across the entire product range. The average costs are for 1 unit. product or group of products.

Financial Accounting

When accounting, allocate:

Attitude to process

According to this criterion, production and non-production types are distinguished. The first relate to the production process directly. Such variable costs include the cost of materials, raw materials, energy, fuel resources, wages of workers, and so on. Non-production costs are not directly related to output. These include, for example, transportation costs, commissions to agents and other administrative and commercial costs.

Calculation

The formula looks like this:

- Variable costs = Costs for raw materials + materials + fuel + electricity + bonus to salary +% of sales.

- Variable costs = gross - fixed costs.

Break even

Consider the role of variable costs in its determination. The break-even point directly depends on these costs. When a company reaches a certain production volume, a moment of equilibrium occurs. At this point, the amount of losses and profits are the same. In this case, net income is equal to 0, and marginal income is equal to fixed costs. This point shows the minimum critical production level at which the enterprise is considered profitable. The company's task is to form a safety zone and create such a level of output and sales of products that would ensure maximum remoteness from the break-even point. The further the company is from this point, the higher its financial stability, profitability, competitiveness. As variable costs increase, this point shifts.

Important point

The model discussed above usually operates with linear relationships between production volume and profit/costs. In practice, these relationships are often non-linear. This situation is due to the fact that the size of output is influenced by a number of factors. These include:

• Seasonality of demand.
• Applied technologies.
• Competitive activities.
• Taxes.
• Macroeconomic indicators.
• "scale effect".
• Subsidies and more.

To ensure the accuracy of the model, it must be applied in the short term to products with stable demand.

Production costs have their own classification, divided in relation to how they "behave" when changing production volumes. Costs belonging to different species behave differently.

Fixed costs (FC, TFC)

fixed costs, as the name implies, this is a set of costs of the enterprise that arise regardless of the volume of products produced. Even when an enterprise does not produce (sell or provide services) anything at all. The abbreviation sometimes used in the literature to refer to such costs is TFC (time-fixed costs). Sometimes it is applied and simply - FC (fixed costs).

Examples of such costs may be the monthly salary of an accountant, rent for premises, land fees, etc.

It should be understood that fixed costs (TFC) are actually conditionally fixed. To a certain extent, they are still affected by production volumes. Imagine that a system for automatic removal of chips and waste is installed in the workshop of a machine-building enterprise. With an increase in the volume of output, it seems that no additional costs arise. But if a certain limit is exceeded, additional preventive maintenance of equipment, replacement of individual parts, cleaning, elimination of current malfunctions, which will occur more often, will be required.

Thus, in theory, fixed costs (expenses) in fact, are such only conditionally. That is, the horizontal line of costs (costs) in the book, in practice, is not. Let's say that it is close to some constant level.

Accordingly, in the diagram (see below), such costs are conditionally shown as a horizontal TFC chart

Variable Production Costs (TVC)

Variable production costs, as the name implies, is a set of costs of the enterprise, which directly depend on the volume of products produced. In the literature, this type of cost is sometimes referred to by the abbreviation TVC (time-variable costs). As the name suggests, " variables"- means increasing or decreasing simultaneously with a change in the volume of products produced by production.

Direct costs include, for example, raw materials that are part of the final product or are consumed in the production process in direct proportion to its load. If an enterprise produces, for example, cast blanks, then the consumption of the metal of which these blanks are composed will directly depend on the production program. To denote the expenditure of resources that are directly used to manufacture a product, the term "direct costs (costs)" is also used. These costs are also variable costs, but not all, since this concept is wider. A significant part of production costs is not directly included in the composition of the product, but varies in direct proportion to the volume of production. Such costs are, for example, the cost of energy resources.

It should be borne in mind that a number of costs for resources used by the enterprise must be divided in order to classify costs. For example, the electricity that is used in heating furnaces of a metallurgical enterprise is referred to as variable costs (TVC), but the other part of the electricity consumed by the same enterprise for lighting the territory of the plant is already referred to as fixed costs (TFC). That is, the same resource that the enterprise has consumed can be divided into parts that can be classified in different ways - as variable or as fixed costs.

There are also a number of costs, the costs of which are classified as conditionally variable. That is, they are associated with production processes, but do not have a directly proportional relationship with respect to production volumes.

In the diagram (see below), variable production costs are displayed as a TVC plot.

This graph is different from the linear one it should be in theory. The fact is that with sufficiently small volumes of production, the direct costs of production are higher than they should be. For example, a mold is designed for 4 castings, and you produce two. The melting furnace is loaded below the design capacity. As a result, more resources are spent than the technological standard. After overcoming a certain value of production volumes, the schedule of variable costs (TVC) becomes close to linear, but then, when a certain value is exceeded, the costs (in terms of a unit of output) begin to grow again. This is due to the fact that when the normal level of production capabilities of the enterprise is exceeded, it is required to spend more resources on the production of each additional unit of output. For example, pay employees overtime, spend more money on equipment repairs (in case of irrational operating conditions, repair costs grow exponentially), etc.

Thus, variable costs are considered to be subject to a linear schedule only conditionally, on a certain segment, within the normal production capacity of the enterprise.

Total Enterprise Cost (TC)

The total costs of an enterprise are the sum of variable and fixed costs. They are often referred to in the literature as TC (total costs).

That is
TC = TFC + TVC

where costs by type:
TC - common
TFC - permanent
TVC - Variables

In the diagram, the total costs are reflected in the TC graph.

Average fixed costs (AFC)

average fixed cost called the quotient of dividing the amount of fixed costs per unit of output. In the literature, this value is referred to as A.F.C. (average fixed costs).

That is
AFC = TFC / Q
where
TFC - fixed production costs (see above)

The meaning of this indicator is that it shows how many fixed costs per unit of output. Accordingly, with the growth of production, each unit of the product has a decreasing share of fixed costs (AFC). Accordingly, a decrease in the amount of fixed costs per unit of production (services) of the enterprise leads to an increase in profits.

On the diagram, the value of the AFC indicator is displayed by the corresponding AFC graph

Average Variable Cost (AVC)

average variable cost called the quotient of dividing the amount of costs for the production of products (services) to their quantity (volume). The abbreviation is often used to refer to them. AVC(average variable costs).

AVC=TVC/Q
where
TVC - variable production costs (see above)
Q - quantity (volume) of production

It would seem that, per unit of output, variable costs should always be the same. However, for reasons discussed earlier (see TVC), production costs fluctuate per unit of output produced. Therefore, for indicative economic calculations, the value of average variable costs (AVC) is taken into account at volumes close to the normal capacity of the enterprise.

On the diagram, the dynamics of the AVC indicator is displayed by a graph with the same name

Average cost (ATC)

The average cost of the enterprise is the quotient of dividing the sum of all the costs of the enterprise to the value of the products (works, services) produced. This value is often referred to as ATC (average total costs). There is also the term "full unit cost".

ATC=TC/Q
where
TC - total (total) costs (see above)
Q - quantity (volume) of production

It should be noted that this value is suitable only for very rough calculations, calculations with minor deviations in the value of production or with a small share of fixed costs in the total cost of the enterprise.

With an increase in production volumes, the calculated value of costs (TC), obtained based on the values ​​of the ATC indicator and multiplied by the volume of production, other than the calculated one, will be greater than the actual one (costs will be overestimated), and with a decrease, on the contrary, they will be underestimated. This will be due to the influence of semi-fixed costs (TFC). Since TC = TFC + TVC, then

ATC=TC/Q
ATC = (TFC + TVC) / Q

Thus, with a change in production volumes, the value of fixed costs (TFC) will not change, which will lead to the error described above.

Dependence of types of costs on the level of production

The graphs show the dynamics of the values ​​of various types of costs depending on the volume of production at the enterprise.

Marginal Cost (MC)

marginal cost is the incremental cost required to produce each additional unit of output.

MC = (TC 2 - TC 1) / (Q 2 - Q 1)

The term "marginal cost" (often referred to in the literature as MC - marginal costs) is not always correctly perceived, as it was the result of an incorrect translation of the English word margin. In Russian, "ultimate" often means "aspiring to the maximum", while in this context it should be understood as "being within the boundaries". Therefore, authors who know English (let's smile here), instead of the word "marginal" use the term "marginal costs" or even just "marginal costs".

From the above formula, it is easy to see that MC for each additional unit of production will be equal to AVC in the interval [ Q 1 ; Q2].

Since TC = TFC + TVC, then
MC = (TC 2 - TC 1) / (Q 2 - Q 1)
MS = (TFC + TVC 2 - TFC - TVC 1) / (Q 2 - Q 1)
MS = (TVC 2 - TVC 1) / (Q 2 - Q 1)

That is, marginal (marginal) costs are exactly equal to the variable costs required to produce additional output.

If we need to calculate MC for a specific production volume, then we assume that the interval we are dealing with is [ 0; Q ] (that is, from zero to the current volume), then at the "zero point" variable costs are zero, production is also zero, and the formula is simplified to the following form:

MS = (TVC 2 - TVC 1) / (Q 2 - Q 1)
MS = TVC Q / Q
where
TVC Q are the variable costs required to produce Q units of output.

Note. You can evaluate the dynamics of various types of costs on the technical

To calculate the cost of production, it is necessary to calculate conditionally fixed and variable costs for the entire production volume and per ton of coal.

Conditionally fixed costs C total for the volume of production are calculated by the formula:

The amount of costs according to the estimate;

V total - total variable costs for the volume of coal.

M h - the cost of materials;

Z s.s. - annual salary of production workers with UST deductions;

З e - the cost of fuel and energy.

Variable costs per unit of output V units are calculated by the formula:

VP is the volume of coal output.

The cost of 1 ton of coal is determined by:

Conditionally fixed costs for the entire planned volume:

V total \u003d 448367.86 + 503261.60 + 261864.66 \u003d 1213494.12 thousand rubles

C total \u003d 1818013.32–1213494.12 \u003d 604519.2 thousand rubles.

Variable costs per unit of output:

rub/t

Conditionally fixed costs per unit of output:

Vusl-post/unit=Sed-Ved, rub/t

Vsl-post/unit=452.24-301.87=150.37 rub/t

2.6. Development of the pricing policy of the section

Using the data obtained on the cost of coal mining and the planned profitability of mining, it is necessary to calculate the possible selling price of products.

The price of a unit of production is determined by the formula:

R is the level of profitability, set based on the goals of maximizing profits, but subject to the price benchmarks of the main competitors in the market.

=542.7 rub/t

Based on the received sales price, calculate the volume of the production program of the mine in value terms:

542.7 * 4020 = 2181654 thousand rubles.

2.6.1. Substantiation of planned performance results

Using the data obtained, we calculate the break-even point.

Thousand tons

At this level of costs, it is enough for the mine to produce 2510.15 thousand tons of coal to cover all the estimated costs of production. Compared to the planned production volume of 4,020 thousand tons per year, a 37% underfulfillment of the plan is allowed to cover the costs.

2.7. Plan for the formation and distribution of profits

Planning for the formation and distribution of profits is carried out by the balance method in a tabular version.

In a market economy, an enterprise independently plans the amount of profit and directions for use. Under these conditions, the purpose of profit planning is to determine its possible value and reserves based on forecasting the cost of production and sales of products, market conditions, inflation, and government tax policy. When developing a plan for profit, it should be borne in mind that VAT and excises are not reflected in this plan, since they are collected before the formation of profit. Profit planning begins after calculating the planned cost of production and sales of products according to economic cost elements.

Table 13 - Plan for the formation and distribution of profits for the year

The profit remaining at the disposal of the enterprise after payment of all production costs and repayment of tax liabilities is 290,913 thousand rubles, which can serve as a basis for further modernization of the mine, the acquisition of the necessary technological improvements to increase the productivity of the mine.

As we remember, we need a business plan not only to understand the goals and ways to achieve them, but also to justify the profitability and the possibility of implementing our investment project.

When doing project calculations, you come across the concept of fixed and variable costs, or expenses.

What is it and what is their economic and practical meaning for us?

Variable costs, by definition, are costs that are not fixed. They are changing. And the change in their value is associated with the volume of output. The larger the volume, the higher the variable costs.

What cost items are included in them and how to calculate them?

All resources that are spent on the production of products can be attributed to variable costs:

• materials;
• accessories;
• employees' wages;
• electricity consumed by a running machine engine.

The cost of all the necessary resources that need to be spent to produce a certain amount of output. These are all material costs, plus the wages of workers and maintenance personnel, plus the cost of electricity, gas, water spent in the production process, plus the cost of packaging and transportation. This also includes the costs of creating stocks of materials, raw materials and components.

Variable costs need to be known per unit of output. Then we can calculate at any time the total amount of variable costs for a certain period of time.
We simply divide the estimated volume of production costs by the volume of production in physical terms. We get the variable costs of producing a unit of output.

This calculation is done for each type of product and service.

How is unit costing different from the variable cost of producing one product or service? Fixed costs are also included in the calculation.

Fixed costs are almost independent of production volumes.

These include:

• management expenses (expenses for maintaining and renting offices, postal services, travel expenses, corporate communications);
• expenses for the maintenance of production (rental of industrial premises and equipment, maintenance of machine tools, electricity, space heating);
• marketing expenses (product promotion, advertising).

Fixed costs remain unchanged until a certain point, until the volume of production becomes too large.

An important step for determining variable and fixed costs, as well as the entire financial plan, is the calculation of personnel costs, which can also be carried out at this stage.

Based on the data that we received in the organizational plan on the structure, staffing, mode of operation, as well as focusing on the data of the production program, we calculate personnel costs. We make this calculation for the entire period of the project.

It is necessary to determine the amount of remuneration for management personnel, production and other employees, as well as the total amount of expenses.

Do not forget to take into account taxes and social contributions, which will also be included in the total amount.

All data are presented in tabular form for ease of calculation.

Knowing fixed and variable costs, as well as product prices, you can calculate the break-even point. This is the level of sales that ensures the self-sufficiency of the enterprise. At the break-even point, there is an equality of the sum of all costs, fixed and variable, and income from the sale of a certain volume of products.

Analysis of the break-even level will make it possible to draw a conclusion about the sustainability of the project.

The enterprise should strive to reduce variable and fixed costs per unit of output, but this is not a direct indicator of production efficiency. It is necessary to take into account the specifics of the enterprise. High fixed costs can be in high-tech industries, and low - in underdeveloped with old equipment. This can also be observed in the analysis of variable costs.

The main goal of your firm is to maximize economic profit. And this is not only reducing costs in any way, but also using various tools to reduce production and management costs by using more productive equipment and increasing labor productivity.