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 cost must a manufacturer bear in order to create a product or service? This:

• costs of raw materials and supplies;
• expenses for utilities, transport and other services;
• payment of taxes, insurance premiums, loan interest;
• payment of salaries to employees;
• depreciation charges.

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 supplies;
• fuel costs;
• payment for electricity;
• piecework wages for hired workers;
• expenses for transport services;
• costs for containers and packaging.

The dynamics of costs depends on the time factor. During the short-term period of a firm's activity, some factors are constant and others are variable. And over the long term, all factors are variable.

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. An analysis of internal costs will help Andrey use his own resources more profitably.
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Social studies mind map No. 23

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Financial planning is the search for the most profitable ways of development and further functioning of the organization. As part of planning, the efficiency of investment, production and financial activities. Therefore, for any enterprise, drawing up a plan of expenses and income allows you not only to obtain data on product costs and profitability, but also to find out comprehensive information about the development of the organization in a certain direction.

A qualitative analysis requires an objective assessment of costs based on changing production volumes. As a rule, the main types of expenses include the costs of an enterprise of variable and fixed types. So what are fixed and variable costs, what does it include and what is their relationship?

Variable costs are expenses that change in size based on increases or decreases in sales activity and production volumes. In addition to direct costs, variables may include financial costs for purchasing tools, necessary materials and raw materials. When converted to a commodity unit, variable costs remain stable, independent of fluctuations in production volumes.

What are variable costs in production?

Fixed cost type: what is it?

Fixed costs in entrepreneurship are those expenses that a company incurs, even if it does not sell anything. In addition, it is worth remembering that when converted to a commodity unit this type expenses change in proportion to the increase or decrease in production volumes.

Fixed costs include:

Interdependence of production costs

The relationship between variable costs and fixed costs is an important indicator. Their interdependence in relation to each other is the break-even point of the organization, which consists in what the enterprise needs to do in order to be considered profitable and have costs equal to zero, that is, absolutely covered by the company’s income.

The break-even point is determined using a simple algorithm:

Break-even point = fixed costs / (cost of one unit of goods - variable costs per unit of goods).

As a result, it is easy to see that it is necessary to manufacture products of such a production volume and at such a cost that they can cover fixed costs, remaining unchanged.

Conditional classification of production costs

In fact, it is quite difficult to draw a clear line between variable and fixed costs with some certainty. If production costs change regularly during the operation of the enterprise, it is recommended to consider them semi-fixed and semi-variable costs. Do not forget that almost every type of cost has elements of certain expenses. For example, when paying for Internet and telephone communications, you can find out the constant share of the required costs (monthly package of services) and the variable share (payment depending on the duration of long-distance calls and minutes spent in mobile communications).

Examples of basic expenses of a conditionally variable type:

1. Variable expenses in the form of components, necessary materials or raw materials during production finished products are defined as conditionally variable costs. Fluctuations in these costs are possible due to rising or falling prices, changes in the technological process, or reorganization of production itself.
2. Variable costs related to piecework direct wages. Such costs vary in quantitative terms and due to fluctuations wage payments with growth or daily norms, as well as with updating the incentive share of payments.
3. Variable costs, including a percentage share to sales managers. These costs are always changing, since the size of payments depends on sales activity.

Examples of basic expenses of a semi-fixed type:

1. Fixed expenses for payments for renting space vary throughout the entire period of operation of the organization. Costs can either increase or decrease, depending on the increase or decrease in rental costs.
2. The accounting department's salary is considered a fixed cost. Over time, the amount of labor costs may increase (which is associated with quantitative changes in staff and expansion of production), or may decrease (when accounting is transferred to).
3. Fixed costs can change when they are moved to variable costs. For example, when an organization produces not only goods for sale, but also a certain share of components.
4. Amounts tax deductions also differ. may increase due to rising costs of space or changes in tax rates. The size of other tax deductions considered fixed expenses may also change. For example, transferring accounting to outsourcing does not imply the payment of salaries, and accordingly, the unified social tax will not need to be accrued.

The above types of conditionally permanent and conditionally variable expenses clearly demonstrate why these costs are considered contingent. During his work, the owner of the enterprise tries to influence changes in profits. For example, reduce costs and increase profits, during the same period the market and others external conditions also have a certain impact on the activities of the enterprise.

As a result, costs regularly change under the influence of certain factors, taking the form of costs of a semi-fixed or semi-variable type.

It is advisable to maintain a balance between expenses from the very beginning of the enterprise. Remember, in order not to need to take out a loan or, you need to rationally approach the analysis of fixed and variable expenses. Since it is precisely this that allows you to build the most effective financial plan companies.

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Any production activity requires financial costs for material and labor resources. The ratio of expenses for ensuring economic activity with the profit received determines the profitability of a business entity. In the economics of an enterprise, these factors occupy a central position, since the level of competitiveness of the company in the market for similar activities depends on them, which has a direct impact on the success of the implementation of the entrepreneurial idea.

Enterprise costs help assess its level of profitability

What are costs

Economic activity carried out in any field is always accompanied by certain monetary expenses for the purchase and use of resources.

These costs in monetary terms are called enterprise costs. They not only influence the formation of the balance of income and expenses, but also determine the need for the acquisition of additional production factors, as well as the possibility of investing in this direction. The parameter allows you to determine the efficiency production activities, as well as the degree of rationality of its organization.

Competence in the economic sphere regarding the division of costs allows the head of a business entity to timely determine the need to use production techniques that reduce costs and increase the return on funds invested in resources for the purchase of raw materials, materials, equipment and hired labor. Such achievements allow us to improve profitability indicators at the end of the reporting period.

Application of the concept in economic theory

What are production costs

Profit received as a result of economic activity is important factor relationships of a cost nature in a market economy. It is the main element of the management mechanism of a business entity. It helps analyze the profitability of a business. Variable and constant costs, examples of which are discussed below, determine the costs of the enterprise, depending on the cost form of the income received. They are a standard for assessing performance, based on which comparative analysis can be carried out.

Representatives state apparatus are interested in reducing costs, since this contributes to the growth of income received, which is the main source of budget replenishment. Therefore, when planning it, the statistical parameters of business entities in this area are taken into account, making it possible to determine the potential amount of mandatory contributions.

What does the parameter value depend on?

The amount of production costs is directly proportional to the cost of acquired resource value factors. The natural desire of the manager of a business entity is to obtain maximum profit while minimum costs. A well-organized economic process allows you to maintain the volume of production activity while minimizing costs, ensured by reducing the resources put into circulation.

A business entity, carrying out activities, in the process of realizing its results, bears additional costs related to market promotion and sales. This item of commercial expenses, called sales costs, includes financial expenses to support activities. Variable costs also include marketing research, advertising, as well as transportation of products to its consumers.

What are the general costs?

Individual expense items include mandatory payments to current accounts government agencies, such as taxes, fees and contributions to trust funds. These types of cash expenses are also components of business costs.

Read also: What is seasonal unemployment

Components of a parameter

The value of production costs is formed from three elements:

• cost price;
• price;
• price.

Cost is the initial cost of a business entity to produce a unit of product. The cost parameter includes all applicable types of costs that affect the amount of profit. The sale of the result of labor is carried out at market value, taking into account the premiums that form the profit item.

Types of costs

Classification of enterprise costs

There are several types of costs, which are easier to understand if you imagine the structure of the enterprise. The result of any production is a transaction that stipulates the sale of the results of labor. The seller's main position is to cover expenses incurred in production activities. Therefore, the cost parameter is primarily included in the price. They may be of an economic, accounting or alternative nature.

Economic costs

What are economic costs

Economic costs imply the economic costs of ensuring the production of a product or provision of a service. The constituent elements of the parameter are:

• material and labor resources acquired to enable the implementation of production activities;
• previously purchased internal resources that are not included in market turnover, without which the company’s functioning is impossible;
• part of the profit considered as compensation for the risk of possible losses or loss of income.

The entrepreneur seeks to compensate the economic criteria of the parameter in terms of value for the results of labor. If he fails to do this, then the meaning of the functioning of the business is lost, and the head of the business entity should look for himself in other areas of activity.

Accounting

What are accounting costs

Accounting costs include expense items that include funds intended for the acquisition of economic resources. These include expenses that are not used to implement the production cycle, but without which its functioning is impossible:

• payment for mental or physical labor of hired workers;
• acquisition or lease of land or water resources;
• investment in means of production, which may be physical or financial in nature.

Accounting costs include only real and legally documented costs aimed at purchasing resources. The parameter takes into account the purchase of equipment, tools, as well as movable and immovable property. This category may also include the issue of securities or shares used as part of the production process.

Accounting costs are always less than economic costs, because accounting does not allow for abstraction.

The parameter can be direct or indirect. Direct expenses take into account the money spent on production. Indirect costs involve spending money to ensure the normal functioning of production. These include deductions for depreciation of equipment, payment of interest to banking institutions for the use in cash, as well as overhead costs.

Alternative

Opportunity Cost

Opportunity costs determine the costs of producing products that a business entity will most likely not produce due to the use of only individual elements of the process to ensure the functioning of the enterprise. These can be categorized as lost profit opportunities. The value of the parameter corresponds to the difference between economic and accounting costs. It is determined independently by each manager of a business entity, depending on his personal idea of ​​the desired profitability of the business.

Classification of a parameter to determine the rational functioning of an enterprise

An increase in production volumes causes an increase in costs to ensure the normal functioning of a business entity.

No enterprise can develop and expand indefinitely, since each business entity has individual restrictions regarding optimal size enterprises. To determine the limits of this boundary, variable and fixed costs.This division is acceptable for short time periods determined by production cycles, during which factors are practically unchanged. For long-term periods all parameters belong to the variable category.

Almost every person dreams of quitting “working for someone else” and opening their own business, which will bring pleasure and a stable income. However, in order to become an aspiring entrepreneur, you will need to create a business plan containing a financial model of the future enterprise. Only this approach to business development will allow you to find out whether the investment in starting your own business can pay off. In this article, we propose to learn about what fixed and variable expenses are and how they affect the profit of the enterprise.

Variable and fixed costs are the two main types of costs.

The importance of drawing up a financial model

Have you ever wondered why you need to draw up a business plan containing a financial model before starting your own business? Creating a business plan allows a novice entrepreneur to obtain information about the expected revenue of the enterprise, as well as determine fixed and variable costs. All these measures are aimed at choosing a strategy for developing the financial policy of the future business.

The commercial component is one of the basic foundations of a successful enterprise. Economic theory says that finance is a benefit that should bring new benefits. It is this theory that needs to be guided in the early stages of entrepreneurial activity. At the heart of every business is the rule that profit is the number one priority. Otherwise, your entire business model will turn into philanthropy.

After we have made it a rule that working at a loss is unacceptable, we should move on to the financial model itself. Enterprise profit is the difference between income and production costs. The latter are divided into two groups: variable and fixed expenses of the organization. In a situation where the level of expenses exceeds current income, the enterprise is considered unprofitable.

The main task of entrepreneurial activity is to extract maximum benefits subject to minimal use of financial resources.

Based on this, we can conclude that to increase income it is necessary to sell as many finished products as possible. However, there is another method of making a profit, which is to reduce production costs. Understanding this scheme is quite difficult, since the process of cost optimization has many different nuances. It is important to mention that economic terms such as "cost level", "cost item" and "production cost" are synonymous. Let's look at all the types of manufacturing costs that exist.

Types of expenses

All expenses of an organization are divided into two groups: variable and fixed costs. This division helps to systematize the budgeting process, and also helps in planning a business development strategy.

Fixed costs are expenses, the amount of which has no connection with the production capacity of the enterprise. This means that this amount does not depend on how much product is produced.

Variable costs are costs whose size varies in proportion to changes in the volume of production

Variable costs include conditionally fixed costs associated with entrepreneurial activity. Such expenses can change their properties and magnitude, depending on the impact of internal and external economic factors.

What do different types of expenses include?

To the number fixed costs You can include the salaries of members of the enterprise administration, but only in a situation where these employees receive payments regardless of the financial condition of the organization. It is important to note that in foreign countries, managers earn income from their organizational skills by expanding the consumer base and exploring new market areas. On Russian territory the situation is completely different. Most department heads receive high salaries, which are not tied to the effectiveness of their activities.

This approach to organizing the production process leads to a loss of incentive to achieve best results. This may explain the low productivity labor indicators many commercial institutions, since the desire to master new technological processes at the top of the company is simply absent.

Speaking about what fixed costs are, it is worth mentioning that this article includes rent . Let's imagine a private company that does not have its own real estate and is forced to rent small room. In this situation, the company administration must transfer a certain amount to the landlord monthly. This situation is considered standard, since it is quite difficult to recoup the purchase of real estate. Some small and middle class entities will require at least five years to return their invested capital.

It is this factor that explains why many entrepreneurs prefer to enter into an agreement to rent the necessary square meters. As mentioned above, rental costs are constant, since the owner of the premises is not interested financial condition your company. For this person, all that is important is the timely receipt of payment specified in the contract.

Fixed expenses include depreciation costs. Any funds must be depreciated monthly until their initial cost is equal to zero. There are many in various ways depreciation, which are regulated by current legislation. According to experts, there are more than a dozen various examples fixed costs. These include utility bills, payment for the removal and processing of waste and expenses for providing the conditions necessary for the implementation of labor activity. Key Feature such expenses is the ease of calculating both present and future costs.

Fixed costs - costs, the value of which almost does not depend on changes in the volume of production

The concept of “variable costs” includes those types of costs that depend on the proportional volume of goods manufactured. For example, consider a balance sheet item that contains an item related to raw materials and supplies. In this paragraph you should indicate the amount of funds that the company will need for production purposes. As an example, consider the activities of a company engaged in the manufacture wooden pallets. To produce one unit of goods, you need to spend two squares of processed wood. This means that to make one hundred pallets, two hundred square meters of material will be required. It is these expenses that fall into the category of variables.

It should be noted that remuneration of employees may be included in both fixed and variable expenses. Similar cases are observed in the following situations:

1. When increasing the production capacity of an enterprise, it is necessary to attract additional workers that will be involved in the manufacturing process.
2. Employee salary is a percentage that depends on various variations in production process.

Under these conditions, it is very difficult to make a forecast about the necessary expenses in order to pay salaries to employees, since its volume will depend on many different factors. The division of expenses into constant and variable is carried out in order to analyze the profitability of the enterprise, as well as determine the degree of unprofitability of the production process. It should be noted that any production activity of a company consumes various energy resources. These resources include fuel, electricity, water and gas. Since their use is an integral part of production, an increase in production volumes leads to an increase in the costs of these resources.

What are fixed and variable costs used for?

One of the goals of this classification of costs is to optimize production costs. Taking into account such details when creating a financial model of an enterprise allows you to identify those positions that can be reduced to supplement income. Also, such data will help you find out how cost reduction will affect the production capacity of the enterprise.

Below we propose to consider fixed and variable costs examples based on an organization engaged in production kitchen furniture. To carry out production activities, the management of such a company needs to invest funds in paying for the lease agreement, utility costs, depreciation costs, purchasing consumables and raw materials, as well as employee salaries. Once the list has been compiled general expenses, all items on this list should be divided into variable and fixed costs.

Knowledge and understanding of the essence of fixed and variable costs is very important for competent business management

The category of fixed expenses includes depreciation costs, as well as salaries of the enterprise administration, including the accountant and director of the company. In addition, this item includes expenses for payment electrical energy, used to illuminate the room. Variable costs include the purchase of raw materials and consumables necessary for the production of an incoming order. In addition, this item includes expenses for utility bills, since some energy resources are used only in the production process itself. This category includes the wages of employees involved in the furniture manufacturing process, since the rate directly depends on the volume of products produced. Transportation costs are also included in the category of variable financial costs of the organization.

How production costs affect the cost of goods

After a financial model of the future enterprise has been created, it is necessary to analyze the influence of variable and fixed costs on the cost of manufactured goods. This allows you to reorganize the company's activities in order to optimize the production process. Such an analysis will help you understand how many personnel will be required to complete a particular task.

Dividing costs into fixed and variable is one of the most important tasks of financial departments of companies

Such a plan allows you to determine the required level of investment in the development of the organization. You can reduce the cost of energy resources by using alternative sources, as well as by purchasing more modernized equipment that has a high efficiency. Next, it is recommended to analyze variable expenses in order to determine their dependence on external factors. These actions will help identify those costs that can be calculated.

All of the above actions allow us to better understand the cost structure of the enterprise, which allows us to modify the organization’s activities in accordance with the chosen development strategy. The main goal is to reduce the cost of manufactured goods in order to increase the number of products sold.

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 the automatic breakdown of costs into fixed and variable costs 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 profitability various types 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, salary of the main production staff(together with charges) 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 terms, 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. Salary production personnel with accruals are classified as variable costs for piecework wages. 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.

Read also: What are variable and fixed costs of an enterprise?

Thus, total variable expenses can be calculated using the formula:

Rperem = C + ZPP + E + TR + X,

C – costs of raw materials;

ZPP – salary of production personnel with deductions;

E – cost of energy resources;

TR – transport costs;

X – other variable expenses that depend on the company’s activity profile.

If an enterprise produces several types of products in quantities W1 ... Wn and per unit of production variable costs are P1 ... Pn, then the total variable costs will be:

Rvariable = W1P1 + W2P2 + … + WnPn

If an organization provides services and pays agents (for example, sales agents) as a percentage of sales, then remuneration to agents is considered a variable cost.

Fixed costs

Fixed production costs of an enterprise are those that do not change in proportion to the volume of production.

The share of fixed costs decreases with increasing production volume (scaling effect).

This effect is not inversely proportional to production volume. For example, an increase in production volume may require an increase in the number of accounting and sales departments. Therefore, they often talk about conditionally fixed costs. Fixed costs also include expenses for management personnel, maintenance of key production personnel (cleaning, security, laundry, etc.), organization of production (communications, advertising, bank expenses, travel expenses, etc.), as well as depreciation charges. Fixed expenses are expenses, for example, for renting premises, and the rental price may change due to changes in market conditions. Fixed costs include some taxes. These are, for example, the unified tax on imputed income (UTII) and property tax. The amounts of these taxes may change due to changes in the rates of such taxes. The amount of fixed costs can be calculated using the formula:

Рpost = Zaup + AR + AM + N + OR