Each enterprise bears 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.
The concept of variable costs
Variable costs - these are costs that are directly proportional to the volume of products, services. If the company produces bakery products, then as an example of variable costs for such an enterprise, we can cite the consumption of flour, salt, and yeast. These costs will grow in proportion to the growth in the volume of bakery products.
One item of expenditure may relate to both variable and fixed costs. Thus, the cost of electricity for industrial ovens on which bread is baked will serve as an example of variable costs. And the cost of electricity for lighting a production building is a fixed cost.
There is such a thing as conditionally variable costs. They are associated with production volumes, but to a certain extent. With a low level of production, some costs are still not reduced. If the production furnace is half loaded, then the energy consumed is the same as for a full furnace. That is, in this case, with a decrease in production, costs do not decrease. But with an increase in output volumes above a certain value, costs will increase.
The main types of variable costs
Here are examples of variable costs of the enterprise:
- Salaries of employees, which depends on the volume of their products. For example, in a bakery, a baker, a packer, if they have piecework wages. It also includes premiums and rewards to sales specialists for specific volumes of products sold.
- The cost of raw materials. In our example, these are 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 spent on the production process. It can be natural gas, gasoline. It all depends on the specifics of a particular production.
- Another typical example of variable costs are taxes paid on the basis of production volumes. These are excise taxes, taxes under the UST (Unified Social Tax), USN (Simplified tax 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
Such a division exists because different variable costs are included in different ways in the cost of goods.
Direct costs are immediately included in the price of the goods.
Indirect costs are allocated to the entire volume of goods produced in accordance with a specific 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 production volumes increase.
Consider an example of average variable costs at a bakery. Variable costs for the month amounted to 4600 rubles., 212 tons of products were produced. Thus, the average variable costs will amount to 21.70 rubles / t.
The concept and structure of fixed costs
They cannot be reduced in a short period of time. With a reduction or increase in output, these costs will not change.
The fixed costs of production usually include the following:
- rent for premises, shops, warehouses;
- utility bills;
- administration salary;
- costs of fuel and energy resources that are consumed not by production equipment, but by lighting, heating, operation of transport, etc .;
- advertising costs;
- payment of interest on bank loans;
- purchase of office supplies, paper;
- the cost of drinking water, tea, coffee for employees of the organization.
Gross costs
All of the above examples of fixed and variable costs in total amount to 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, are payments for acquired resources - labor, materials, fuel, etc. The profitability indicator is calculated using the sum of fixed and variable costs. An example of calculating the profitability of the main activity: divide the profit by the amount of costs. Profitability shows the effectiveness of the organization. The higher the profitability, the better the organization works. If profitability is below zero, then expenses exceed revenues, that is, the organization’s activities are ineffective.
Enterprise Cost Management
It is important to understand the essence of variable and fixed costs. With proper management of costs at the enterprise, their level can be reduced and make a big profit. Fixed costs are almost impossible to reduce, so effective work to reduce costs can be done in terms of variable costs.
How can you reduce costs in the enterprise
In each organization, work is structured differently, but basically there are the following areas of cost reduction:
1. Reducing labor costs. It is necessary to consider the issue of optimizing the number of employees and tightening production standards. Some employee can be reduced, and his responsibilities to distribute among the rest with the implementation of additional payments for additional work. If the enterprise increases production and there is a need to hire additional people, then you can go by revising production standards and expanding service areas or increasing the volume of work for old workers.
2. Raw materials are an important part of variable costs. Examples of their reduction may be as follows:
- searching for other suppliers or changing the terms of supply by old suppliers;
- the introduction of modern economical resource-saving processes, technologies, equipment;
- the termination of the use of expensive raw materials or materials or their replacement with cheap analogues;
- 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 may be the selection of other options for rental payments, leasing of space.
Also, this includes savings on utility bills, for which it is necessary to carefully use electricity, water, heat.
Savings on repair and maintenance of equipment, vehicles, premises, buildings. It is necessary to consider whether it is possible to postpone repairs or maintenance, is it possible to find new contractors for these purposes, or is it cheaper to do it yourself.
It is also necessary to pay attention to the fact that it can be more profitable and more economical to narrow production, to transfer some side functions to another manufacturer. Or vice versa, enlarge production and carry out some functions on their own, refusing to cooperate with subcontractors.
Other areas of cost reduction may include organization transportation, advertising, tax burden reduction, debt repayment.
Any enterprise should consider its costs. Work to reduce them will bring more profit and increase the effectiveness of the organization.