What refers to fixed costs: conditionality of costs and their relationship. Does it make sense to divide costs into variable and fixed?

One of the main features of financial management (as well as management accounting) is that it divides costs into two main types:

a) variable or margin;

b) constant.

With this classification, it is possible to estimate how much the total cost will change with an increase in production volumes and sales of products. In addition, by estimating the total income for different volumes of products sold, it is possible to measure the amount of expected profit and cost with an increase in sales volumes. This method of management calculations is called break-even analysis or income assistance analysis.

Variable costs are costs that, with an increase or decrease in the volume of production and sales of products, respectively increase or decrease (in total). Variable costs per unit of output produced or sold represent the additional costs incurred in creating that unit. Such variable costs are sometimes called marginal costs per unit produced or sold, which are the same for each additional unit. Graphical total, variable and fixed costs are shown in Fig. 7.

Fixed costs are costs whose value is not affected by changes in the volume of production and sales of products. Examples of fixed costs are:

a) salary of management personnel, which does not depend on the volume of products sold;

b) rent for premises;

c) depreciation of machinery and mechanisms, accrued using the straight-line method. It is accrued regardless of whether the equipment is used partially, completely, or is completely idle;

d) taxes (on property, land).

Rice. 7. Graphs of total (total) costs

Fixed costs are costs that do not change over a given period of time. Over time, however, they increase. For example, the rent for industrial premises for two years is twice the rent for a year. Similarly, depreciation charged on capital goods increases as the capital goods age. For this reason, fixed costs are sometimes called periodic costs because they are constant over a specific period of time.

The overall level of fixed costs may vary. This happens when the volume of production and sales of products increases or decreases significantly (purchase of additional equipment - depreciation, recruitment of new managers - wages, hiring of additional premises - rent).

If the selling price of a unit of a certain type of product is known, then the gross revenue from the sale of this type of product is equal to the product of the selling price of a unit of product by the number of units sold.

As sales volume increases by one unit, revenue increases by the same or constant amount, and variable costs also increase by a constant amount. Therefore, the difference between the selling price and the variable costs of each unit of output must also be constant. This difference between the selling price and unit variable costs is called gross profit per unit.

Example

A business entity sells a product for 40 rubles. per unit and expects to sell 15,000 units. There are two technologies for producing this product.

A) The first technology is labor-intensive, and variable costs per unit of production are 28 rubles. Fixed costs are equal to 100,000 rubles.

B) The second technology uses equipment that facilitates labor, and variable costs per unit of production are only 16 rubles. Fixed costs are equal to 250,000 rubles.

Which of the two technologies allows you to get higher profits?

Solution

The break-even point is the volume of product sales at which the revenue from its sale is equal to the gross (total) costs, i.e. there is no profit, but there are also no losses. Gross profit analysis can be used to determine the break-even point because if

revenue = variable costs + fixed costs, then

revenue - variable costs = fixed costs, i.e.

total gross profit = fixed costs.

To break even, the total gross profit must be sufficient to cover fixed costs. Since the total gross profit is equal to the product of the gross profit per unit of product and the number of units sold, the break-even point is determined as follows:

Example

If the variable costs per unit of product are 12 rubles, and the proceeds from its sale are 15 rubles, then the gross profit is equal to 3 rubles. If fixed costs are 30,000 rubles, then the break-even point is:

30,000 rub. / 3 rub. = 10,000 units

Proof

Gross profit analysis can be used to determine the volume of sales (sales) of products required to achieve the planned profit for a given period.

Because the:

Revenue - Gross costs = Profit

Revenue = Profit + Gross costs

Revenue = Profit + Variable costs + Fixed costs

Revenue - Variable costs = Profit + Fixed costs

Gross profit = Profit + Fixed costs

The required gross profit must be sufficient: a) to cover fixed costs; b) to obtain the required planned profit.

Example

If a product is sold for 30 rubles, and unit variable costs are 18 rubles, then the gross profit per unit of product is 12 rubles. If fixed costs are equal to 50,000 rubles, and the planned profit is 10,000 rubles, then the sales volume required to achieve the planned profit will be:

(50,000 + 10,000) / 125,000 units.

Proof

Example

Estimated profit, break-even point and target profit

XXX LLC sells one type of product. Variable costs per unit of production are 4 rubles. At a price of 10 rubles. demand will be 8,000 units, and fixed costs will be 42,000 rubles. If you reduce the price of the product to 9 rubles, then demand increases to 12,000 units, but fixed costs will increase to 48,000 rubles.

You need to determine:

a) estimated profit at each selling price;

b) break-even point at each selling price;

c) the volume of sales required to achieve the planned profit of 3,000 rubles at each of the two prices.

b) To break even, gross profit must equal fixed costs. The break-even point is determined by dividing the sum of fixed costs by the gross profit per unit of production:

42,000 rub. / 6 rub. = 7,000 units

48,000 rub. / 5 rub. = 9,600 units

c) The total gross profit required to achieve the planned profit of 3,000 rubles is equal to the sum of fixed costs and planned profit:

Break-even point at a price of 10 rubles.

(42,000 + 3,000) / 6 = 7,500 units.

Break-even point at a price of 9 rubles.

(48,000 + 3,000) / 5 = 10,200 units.

Gross profit analysis is used in planning. Typical cases of its application are as follows:

a) choosing the best selling price for the product;

b) choosing the optimal technology for producing a product if one technology gives low variable and high fixed costs, and the other gives higher variable costs per unit of production, but lower fixed costs.

These problems can be solved by determining the following quantities:

a) estimated gross profit and profit for each option;

b) break-even sales volume of products for each option;

c) the volume of product sales necessary to achieve the planned profit;

d) the volume of product sales at which two different production technologies give the same profit;

e) the volume of product sales necessary to eliminate the bank overdraft or to reduce it to a certain level by the end of the year.

When solving problems, it is necessary to remember that the volume of product sales (i.e., demand for products at a certain price) is difficult to accurately predict, and the analysis of the estimated profit and break-even volume of product sales should be aimed at taking into account the consequences of failure to meet planned targets.

Example

A new company, TTT, is created to produce the patented product. Company directors are faced with a choice: which of two production technologies to prefer?

Option A

The company purchases parts, assembles finished products from them, and then sells them. Estimated costs are:

Option B

The company purchases additional equipment that allows it to perform some technological operations in the company's own premises. Estimated costs are:

The maximum possible production capacity for both options is 10,000 units. in year. Regardless of the sales volume achieved, the company intends to sell the product for 50 rubles. for a unit.

Required

Conduct an analysis of the financial results of each of the options (as far as available information allows) with appropriate calculations and diagrams.

Note: taxes are not taken into account.

Solution

Option A has higher variable costs per unit of output, but also lower fixed costs than Option B. The higher fixed costs of Option B include additional depreciation amounts (for more expensive premises and new equipment), as well as interest costs on bonds, since option B involves the company in financial dependence. The above decision does not address the concept of debt, although it is part of the full answer.

Estimated output is not given, so uncertainty in product demand must be an important element of the decision. However, it is known that the maximum demand is limited by production capacity (10,000 units).

Therefore we can define:

a) maximum profit for each option;

b) break-even point for each option.

a) if the need reaches 10,000 units.

Option B gives higher profits with higher sales volumes.

b) to ensure break-even:

Break-even point for option A:

80,000 rub. / 16 rub. = 5,000 units

Break-even point for option B

185,000 rub. / 30 rub. = 6,167 units

The break-even point for option A is lower, which means that if demand increases, profit under option A will be received much faster. In addition, when demand is low, option A results in higher profits or lower losses.

c) if option A is more profitable at low sales volumes, and option B is more profitable at high volumes, then there must be some point of intersection at which both options have the same total profit for the same total product sales volume. We can determine this volume.

There are two methods for calculating sales volume at the same profit:

Graphic;

Algebraic.

The most visual way to solve the problem is to plot the dependence of profit on sales volume. This graph shows the profit or loss for each sales value for each of the two options. It is based on the fact that profit increases evenly (straightforward); gross profit for each additional unit of product sold is a constant value. In order to build a straight-line profit graph, you need to plot two points and connect them.

With zero sales, the gross profit is zero, and the company suffers a loss in an amount equal to fixed costs (Fig. 8).

Algebraic solution

Let the sales volume at which both options give the same profit be equal to x units. Total profit is total gross profit minus fixed costs, and total gross profit is gross profit per unit multiplied by x units.

According to option A, the profit is 16 X - 80 000

Rice. 8. Graphic solution

According to option B, the profit is 30 X - 185 000

Since with sales volume X units the profit is the same, then

16X - 80 000 = 30X - 185 000;

X= 7,500 units

Proof

An analysis of the financial results shows that due to the higher fixed costs of option B (partly due to the cost of paying interest on the loan), option A comes to breakeven much faster and is more profitable up to a sales volume of 7,500 units. If demand is expected to exceed 7,500 units, then option B will be more profitable. Therefore, it is necessary to carefully study and evaluate the demand for this product.

Since the results of demand assessment can rarely be considered reliable, it is recommended to analyze the difference between the planned volume of product sales and the break-even volume (the so-called “safety zone”). This difference shows how much the actual volume of product sales can be less than planned without loss for the enterprise.

Example

A business entity sells a product at a price of 10 rubles. per unit, and variable costs are 6 rubles. Fixed costs are equal to 36,000 rubles. The planned sales volume of products is 10,000 units.

Planned profit is determined as follows:

Break even:

36,000 / (10 - 6) = 9,000 units.

The “safety zone” is the difference between the planned volume of product sales (10,000 units) and the break-even volume (9,000 units), i.e. 1,000 units As a rule, this value is expressed as a percentage of the planned volume. Thus, if in this example the actual sales volume of products is less than planned by more than 10%, the company will not be able to break even and will incur a loss.

The most complex gross profit analysis is calculating the volume of sales required to eliminate a bank overdraft (or reduce it to a certain level) during a specified period (year).

Example

An economic entity buys a machine to produce a new product for 50,000 rubles. The price structure of the product is as follows:

The machine is purchased entirely through an overdraft. In addition, all other financial needs are also covered by an overdraft.

What should be the annual volume of products sold to cover the bank overdraft (by the end of the year), if:

a) all sales are made on credit and debtors pay them within two months;

b) inventories of finished products are stored in the warehouse for one month until they are sold and are valued in the warehouse at variable costs (as work in progress);

c) suppliers of raw materials provide a business entity with a monthly loan.

In this example, a bank overdraft is used to purchase the machine, as well as to cover general operating costs (all of which are paid in cash). Depreciation is not a cash expense, so the amount of overdraft is not affected by the amount of depreciation. During the manufacture and sale of a product, variable costs are incurred, but they are covered by revenue from the sale of products, resulting in the formation of a gross profit.

The gross profit per unit of product is 12 rubles. This figure may suggest that the overdraft can be covered with a sales volume of 90,000 / 12 = 7,500 units. However, this is not the case, since it ignores the increase in working capital.

A) Debtors pay for the goods they purchase on average after two months, so out of every 12 units sold, two remain unpaid at the end of the year. Consequently, on average, out of every 42 rubles. sales (unit price) one sixth (RUB 7) at the end of the year will be outstanding receivables. The amount of this debt will not reduce the bank overdraft.

B) Similarly, at the end of the year there will be a month's supply of finished products in the warehouse. The cost of producing these products is also an investment in working capital. This investment requires funds, which increases the overdraft amount. Since this increase in inventories represents the monthly sales volume, it is on average equal to one-twelfth of the variable costs of producing a unit of output (2.5 rubles) sold during the year.

C) The increase in accounts payable compensates for the investment in working capital, since at the end of the year, due to the provision of a monthly loan, on average, out of every 24 rubles spent on the purchase of raw materials (24 rubles - material costs per unit of production), 2 rubles . will not be paid.

Let's calculate the average cash receipts per unit of production:

To cover the cost of the machine and operating expenses and thus eliminate the overdraft for the year, product sales must be

90,000 rub. / 4.5 rub. (cash) = 20,000 units.

With an annual sales volume of 20,000 units. profit will be:

The effect on cash receipts is best illustrated by the balance sheet example of a change in cash position:

In aggregate form as a report on the sources and use of funds:

Profits are used to finance the purchase of the machine and investment in working capital. Therefore, by the end of the year the following change in the cash position occurred: from an overdraft to a “no change” position - i.e. the overdraft has just been repaid.

When solving such problems, a number of features should be taken into account:

– depreciation expenses should be excluded from fixed costs;

– investments in working capital are not fixed expenses and do not affect the break-even analysis at all;

– draw up (on paper or mentally) a report on the sources and use of funds;

– expenses that increase the size of the overdraft are:

– purchase of equipment and other fixed assets;

– annual fixed costs, excluding depreciation.

The gross profit ratio is the ratio of gross profit to selling price. It is also called the "income-revenue ratio." Since unit variable costs are a constant value and, therefore, at a given selling price, the amount of gross profit per unit of product is also constant, the gross profit coefficient is a constant for all values ​​of sales volume.

Example

Specific variable costs for a product are 4 rubles, and its selling price is 10 rubles. Fixed costs amount to 60,000 rubles.

The gross profit ratio will be equal to

6 rub. / 10 rub. = 0.6 = 60%

This means that for every 1 rub. the income received from sales, the gross profit is 60 kopecks. To ensure break-even, gross profit must be equal to fixed costs (60,000 rubles). Since the above coefficient is 60%, the gross revenue from product sales required to ensure break-even will be 60,000 rubles. / 0.6 = 100,000 rub.

Thus, the gross profit ratio can be used to calculate the break-even point

The gross profit ratio can also be used to calculate the volume of product sales required to achieve a given profit level. If a business entity wanted to make a profit in the amount of 24,000 rubles, then the sales volume should have been the following amount:

Proof

If the problem gives sales revenue and variable costs, but does not give the selling price or unit variable costs, you should use the gross profit ratio method.

Example

Using the Gross Profit Ratio

The business entity has prepared a budget for its activities for the next year:

The company's directors are not satisfied with this forecast and believe that it is necessary to increase sales.

What level of product sales is necessary to achieve a given profit of 100,000 rubles.

Solution

Since neither the selling price nor the specific variable costs are known, gross profit should be used to solve the problem. This coefficient has a constant value for all sales volumes. It can be determined from the available information.

Analysis of decisions made

Analysis of short-term decisions involves choosing one of several possible options. For example:

a) selection of the optimal production plan, product range, sales volumes, prices, etc.;

b) choosing the best of mutually exclusive options;

c) deciding on the advisability of conducting a particular type of activity (for example, whether an order should be accepted, whether an additional work shift is needed, whether to close a department or not, etc.).

Decisions are made in financial planning when it is necessary to formulate the production and commercial plans of an enterprise. Analysis of decisions made in financial planning often comes down to the application of variable costing methods (principles). The main task of this method is to determine which costs and incomes will be affected by the decision made, i.e. what specific costs and revenues are relevant for each of the proposed options.

Relevant costs are costs of a future period that are reflected in cash flow as a direct consequence of the decision made. Only relevant costs should be considered in the decision-making process, since it is assumed that future profits will ultimately be maximized provided that the business entity's "monetary profit", i.e. cash income received from the sale of products minus cash costs for production and sales of products are also maximized.

Costs that are not relevant include:

a) past costs, i.e. money already spent;

b) future expenses resulting from certain previously made decisions;

c) non-cash costs, for example, depreciation.

The relevant costs per unit of output are typically the variable (or marginal) costs of that unit.

It is assumed that profits ultimately produce cash receipts. Declared profit and cash receipts for any period of time are not the same thing. This is due to various reasons, for example, time intervals when granting loans or features of depreciation accounting. Ultimately, the resulting profit gives a net influx of an equal amount of cash. Therefore, in decision accounting, cash receipts are treated as a means of measuring profit.

The “opportunity cost” is the income that a company gives up by choosing one option over the most profitable alternative. Let us assume as an example that there are three mutually exclusive options: A, B and C. The net profit for these options is equal to 80, 100 and 90 rubles, respectively.

Since you can choose only one option, option B seems to be the most profitable, since it gives the greatest profit (20 rubles).

A decision in favor of B will be made not only because he makes a profit of 100 rubles, but also because he makes a profit of 20 rubles. more profit than the next most profitable option. "Opportunity cost" can be defined as "the amount of revenue that a company sacrifices in favor of an alternative option."

What happened in the past cannot be returned. Management decisions only affect the future. Therefore, in the decision-making process, managers only need information about future costs and income that will be affected by the decisions made, since they cannot affect past costs and profits. Past expenses in decision-making terminology are called sunk costs, which:

a) either have already been accrued as direct costs for the manufacture and sale of products for the previous reporting period;

b) or will be accrued in subsequent reporting periods, despite the fact that they have already been made (or the decision to make them has already been made). An example of such a cost is depreciation. After the acquisition of fixed assets, depreciation may accrue over several years, but these costs are sunk.

Relevant costs and income are deferred income and expenses arising from the choice of a particular option. They also include revenues that could have been earned by choosing another option, but which the enterprise foregoes. "Opportunity value" is never shown in financial statements, but it is often mentioned in decision-making documents.

One of the most common problems in the decision-making process is making decisions in a situation where there are not enough resources to meet potential demand and a decision must be made on how to most effectively use the available resources.

The limiting factor, if any, should be determined when preparing the annual plan. Limiting factor decisions therefore relate to routine rather than ad hoc actions. But even in this case, the concept of “cost of chance” appears in the decision-making process.

There may be only one limiting factor (other than maximum demand), or there may be several limited resources, two or more of which may set the maximum level of activity that can be achieved. To solve problems with more than one limiting factor, operations research methods (linear programming) should be used.

Solutions to Limiting Factors

Examples of limiting factors are:

a) volume of product sales: there is a limit to the demand for products;

b) labor force (total number and by specialty): there is a shortage of labor to produce a volume of products sufficient to meet demand;

c) material resources: there is not a sufficient amount of materials to manufacture products in the volume necessary to meet demand;

d) production capacity: the productivity of technological equipment is insufficient to produce the required volume of products;

e) financial resources: there is not enough money to pay the necessary production costs.

As you know, costs are the costs of an enterprise expressed in monetary terms for the production of goods.

It is very important for any company to have the most complete information about costs. This allows you to correctly set the price of manufactured products, calculate the level of efficiency of processes, learn about the efficiency of resource use by specific departments, etc.

Definition

In general, specialists divide costs into fixed and variable e. Fixed costs do not depend on the level of output. These include renting premises, costs for personnel retraining, payment of utilities, etc.

The amount of variable costs depends on the volume of products produced. The main feature: when production stops, this type of waste disappears.

It should be noted that this division is very arbitrary. For example, conditionally variable costs are also distinguished. Their value depends on the company’s business activity, but such dependence is not direct. These include, for example, long-distance calls as part of the subscription fee for telephone services.

As a rule, variable expenses can be considered direct. This means that, firstly, they are directly related to the production of a product or service, and secondly, they can be included in the cost of goods based on primary documentation without any additional calculations.

You can find out more detailed information about these indicators in the following video:

Varieties

Without delving into the essence of the problem, one can decide that the growth of such costs grows with an increase in production volume, with an increase in product sales, etc. However, this is not entirely true. Depending on the nature of the output volume, variable costs include:

• proportional, which increase with an increase in production volume (if the production of goods increases by 20%, then spending proportionally increases by 20%);
• regressive variables, the growth rate of which is slightly behind the growth rate of production (if production increases by 20%, spending can only increase by 15%);
• progressive variable, which increase slightly faster than the production and sale of goods increases (if production increases by 20%, spending increases by 25%).

Thus, we see that the value of variable costs is not always directly proportional to the volume of production. For example, if, in the event of an expansion of the enterprise and an increase in the volume of output, a night shift is introduced, then the payment for it will be higher.

Direct and indirect costs among the variables are distinguished rather arbitrarily:

• Usually to straight lines refers to the costs that may be associated with the production of a particular product. They relate directly to the cost of the product. This could be spending on raw materials, fuel or wages for workers.
• To indirect General shop and plant expenses can be included, that is, those associated with the production of a group of goods. Due to factors such as technological specifics or economic feasibility, they cannot be attributed directly to cost. The most common example is the purchase of raw materials in complex industries.

In statistical documentation, expenses are divided into total and average. This division makes sense in the reporting documents of enterprises:

• Average are calculated by dividing variable expenses by the volume of goods produced.
• Are common is the sum of the organization's fixed and variable costs.

We can also talk about production and non-production types. This division is directly related to the manufacturing process of products:

• Production are included in the cost of goods. They are tangible and can be inventoried.
• Non-productive they no longer depend on production volumes, but on duration. Therefore, it is impossible to inventory them.

Thus, we can highlight the following most common examples of variable costs in production:

• wages of workers, depending on the volume of goods produced by them;
• the cost of raw materials and other materials necessary for the manufacture of products;
• expenses for warehousing, transportation and storage of goods;
• interest paid to sales managers;
• taxes related to production volumes: VAT, excise taxes, etc.;
• services of other organizations related to production services;
• the cost of energy resources at enterprises.

How to count them?

For convenience, variable costs can be expressed schematically as follows:

• Variable expenses = Raw materials + Supplies + Fuel + Percentage of wages, etc.

For the convenience of calculating the dependence of expenses on production volume, the German economist Mellerovich introduced cost response factor (K). The formula showing the relationship between cost changes and productivity growth looks like this:

K = Y/X, Where:

• K is the cost response coefficient;
• Y – cost growth rate (in percent);
• X is the growth rate of production (trade exchange, business activity), also calculated as a percentage.

• 110% / 110% = 1

The response coefficient of progressive spending will be greater than one:

• 150% / 100% = 1,5

Therefore, the coefficient of regressive expenses is less than 1, but more than 0:

• 70% / 100% = 0,7

The cost of any unit of production can be expressed by the following formula:

Y= A + bX, Where:

• Y denotes total costs (in any monetary unit, for example, rubles);
• A – constant part (i.e. one that does not depend on production volumes);
• b – variable costs, which are calculated per unit of product (expense response coefficient);
• X is an indicator of the enterprise’s business activity, presented in natural units.

AVC = VC/Q, Where:

• AVC – average variable costs;
• VC – variable costs;
• Q – volume of output.

On the graph, average variable costs are usually presented as an increasing curved line.

Production costs are actually payments for purchased factors. Their research must provide certain volumes of production in order to fully cover the costs and ensure an acceptable profit. Income is a dynamic driver of organizational activity; costs are an important component for economic analysis. Organizations approach profit and cost differently. Income must provide maximum production possibilities for a given cost value. The greatest production efficiency will be at the lowest cost. They will include the costs of producing the goods. For example, the purchase of raw materials, electricity, payment of working hours, depreciation, organization of production. Part of the proceeds will be used to pay off production costs incurred, while the other will remain profit. This allows us to assert that costs are less than the price of the product by the profit margin.

The above statements lead to the conclusion: production costs are the costs of obtaining goods, and one-time costs arise only during the initial organization of production.

A company faces many ways to generate profit and convert it into cash. For each method, the leading factors will be costs - the real expenses that the organization incurs during production activities in order to obtain a positive income. If management ignores expenses, then financial and economic activities become unpredictable. The profit at such an enterprise begins to decrease, and over time becomes negative, which means a loss.

In practice, this happens due to the inability to describe production costs in detail. Even an experienced economist will not always understand the structure of costs, existing relationships and the main factors of production.

Analyzing costs should begin with classification. It will provide a comprehensive understanding of the main characteristics and properties of costs. Costs are a complex phenomenon and cannot be represented using a single classification. Generally speaking, each enterprise can be considered a trading, manufacturing or service enterprise. The information presented applies to all enterprises, but to a greater extent to manufacturing ones, since they have a more complex cost structure.

The main differences in the general classification will be the place where costs appear and their relationship to areas of activity. The above classification is used to systematize expenses in profit reports and for a comparative analysis of the required types of expenses.

Primary types of expenses:

• Production

1. production invoices;
2. direct materials;
3. direct labor.

• Non-productive

1. operating expenses;
2. administrative expenses.

Direct costs are always variable. But in general production, commercial and general economic costs, fixed costs coexist with variable costs. A simple example: mobile phone charges. The constant component will be the subscription fee, and the variable component is determined by the amount of time agreed upon and the availability of long-distance calls. When accounting for costs, it is necessary to clearly understand the classification of costs and correctly separate them.

According to the classification used, costs are divided into non-production and production. Manufacturing costs include: direct labor, direct materials, and production overhead. Spending on direct materials consists of the costs that the enterprise had when purchasing raw materials and components, in other words, what is directly related to production and passed into finished products.

Direct labor costs refer to the payment of production personnel and effort associated with the manufacture of a product. Payments for shop foremen, managers and equipment adjusters are production overhead costs. It is worth considering the accepted convention when defining it in modern manufacturing, where “real direct” labor is rapidly declining in highly automated production. In some enterprises, production is fully automated, which does not require direct labor. But the designation “main production workers” is retained; payment is considered the cost of direct labor of the enterprise.

Manufacturing overhead costs include the remaining costs of maintaining production. In practice, the structure is complex, the volumes are scattered over a wide range. Typical production overhead costs include indirect materials, electricity, indirect labor, equipment maintenance, thermal energy, repairs of premises, part of tax payments that are included in gross costs and other things inherently associated with the production of products in the company.

Non-production costs are divided into sales and administrative costs. The costs of selling a product consist of expenses that were aimed at preserving the product, promoting it on the market, and delivering it. Administrative costs are the totality of all expenses for managing a company - maintaining the management apparatus: planning and financial department, accounting.

Financial analysis implies a gradation of costs: variable and fixed. The division is justified by the contradictory reaction to changes in production volume. Western theory and practice of management accounting takes into account a number of distinctions:

• cost division method;
• conditional classification of costs;
• influence of production volume on cost behavior.

Systematization is important for planning and analyzing production. Fixed costs remain relatively constant in magnitude. When production increases, they turn out to be an important component in reducing costs; when volume increases, their share in a unit of finished goods decreases.

Variable costs

Variable costs will be costs, one hundred percent of which is directly proportional to production volume. Variable costs are directly proportional to production volumes. Growth occurs when output increases and vice versa. However, in units of production, variable costs will remain constant. They are usually classified by percentage changes depending on production volume:

• progressive;
• degressive;
• proportional.

Variable management should be based on economy. It is achieved through organizational and technical measures that reduce the share of costs per unit of goods:

• productivity growth;
• reducing the number of workers;
• reduction in inventories of materials and finished products during difficult economic periods.

Variable costs are used in the analysis of break-even production, choice of economic policy, and planning of economic activities.

Fixed costs will be costs, 100% of which are not determined by production. Fixed costs per unit of output will decrease as production volume increases and, conversely, increase as production volume decreases.

Fixed expenses are associated with the existence of the organization and are paid even in the absence of production - rent, payment for management activities, depreciation of buildings. Fixed costs, in other words, are called overhead, indirect.

The high level of fixed costs is determined by labor characteristics, which depend on mechanization and automation, and the capital intensity of products. Fixed costs are less susceptible to sudden changes. In the presence of objective limitations, there is a great potential for reducing fixed costs: the sale of unnecessary assets. Reducing administrative and management costs, reducing utility bills by saving energy, renting or leasing equipment.

Mixed costs

In addition to variable and fixed costs, there are other costs that do not lend themselves to the above classification. They will be constant and variable, called “mixed”. The following methods for classifying mixed costs into variable and fixed parts are accepted in economics:

• method of experimental assessments;
• engineering or analytical method;
• graphical method: the dependence of volume on the cost of goods is established (supplemented with analytical calculation);
• economic and mathematical methods: least squares method; correlation method, low-high point method.

Each industry has its own dependence of each type of cost on production volume. It may turn out that some expenses are considered variable in one industry, and constant in another.

It is impossible to use a single classification of dividing costs into variable or constant for all industries. The range of fixed costs cannot be uniform for different industries. It must take into account the specifics of production, the enterprise and the procedure for assigning costs to cost. The classification is created individually for each area, technology or production organization.

The standards allow differentiation of costs based on changes in production volume.

Fixed and variable costs are the basis of a common economic method. It was first proposed by Walter Rautenstrauch in 1930. This was a planning option, which in the future was called the break-even schedule.

It is actively used by modern economists in various modifications. The main advantage of the method is that it allows you to quickly and accurately predict the main performance indicators of the company when market conditions change.

When constructing, the following conventions are used:

• the price of raw materials is assumed to be constant for the planning period under consideration;
• fixed costs remain unchanged over a certain sales range;
• variable costs remain constant per unit as sales volume changes;
• uniformity of sales is accepted.

The horizontal axis indicates production volumes as a percentage of capacity used or per unit of goods produced. The verticals indicate income and production expenses. All costs on the graph are usually divided into variable (PV) and constant (FP). Additionally, gross costs (VI) and sales revenue (VR) are applied.

The intersection of revenue and gross costs forms the break-even point (K). At this point, the company will not make a profit, but will not incur losses either. The volume at the break-even point is called critical. If the actual value is less than the critical value, then the organization is operating at a disadvantage. If production volumes are greater than the critical value, then profit is generated.

You can determine the break-even point using calculations. Revenue is the total value of costs and profit (P):

VR = P+PI+POI,

IN break-even point P = 0, accordingly the expression takes a simplified form:

BP = PI + POI

Revenue will be the product of the cost of production and the volume of goods sold. Variable costs are rewritten through the output volume and SPI. Taking into account the above, the formula will look like:

C*Vkr = POI + Vkr*SPI

• Where SPI- variable costs per unit of production;
• C- unit cost of goods;
• Vkr- critical volume.

Vkr = POI/(C-SPI)

Break-even analysis allows you to determine not only the critical volume, but also the volume to obtain the planned income. The method allows you to compare several technologies and choose the most optimal one.

Cost and cost reduction factors

Analysis of the actual cost of production, determination of reserves, and the economic effect of reduction is based on calculations based on economic factors. The latter make it possible to cover most processes: labor, its objects, means. They characterize the main areas of work to reduce the cost of goods: increasing productivity, efficient use of equipment, introducing new technologies, modernizing production, reducing the cost of workpieces, reducing the management staff, reducing defects, non-production losses, and expenses.

Cost savings are determined by the following factors:

• Growth of technical level. This occurs with the introduction of more advanced technologies, automation and mechanization of production, better use of raw materials and new materials, revision of technological characteristics and product design.
• Modernization of work organization and productivity. Cost reduction occurs when production organization, methods and forms of labor change, which is facilitated by specialization. Improve management while minimizing costs. They are reviewing the use of fixed assets, improving logistics and minimizing transportation costs.
• Reduction of semi-fixed costs by changing the structure and volume of production. This reduces depreciation, changes the assortment and quality of goods. The volume of output does not directly affect semi-fixed costs. With an increase in volumes, the share of semi-fixed costs per unit of goods will decrease, and accordingly the cost will decrease.
• Better use of natural resources is required. It is worth considering the composition and quality of the source material, changes in mining methods and location of deposits. This is an important factor that shows the influence of natural conditions on variable costs. The analysis should be based on industry methodologies of the extractive industry.
• Industry factors, etc. This group includes the development of new workshops, production and production units, as well as preparation for them. Reserves for cost reduction are periodically reviewed when liquidating old ones and introducing new ones, which will improve economic factors.

Reduced fixed costs:

• reduction of administrative and commercial expenses;
• reduction in commercial services;
• increased load;
• sale of unused intangible and current assets.

Reduced variable costs:

• reducing the number of main and auxiliary workers by increasing labor productivity;
• use of time-based payment;
• preference for resource-saving technologies;
• use of more economical materials.

The listed methods lead to the following conclusion: cost reduction should mainly occur by minimizing preparatory processes, mastering a new range and technologies.

Changing the range of products becomes an important factor determining the level of production costs. With excellent profitability, a shift in the assortment should be associated with improving the structure and increasing production efficiency. This can either increase or decrease production costs.

Classifying costs into variable and fixed has a number of advantages, which many enterprises actively use. In parallel with it, accounting and grouping of costs by cost is used.

Financial planning is the search for the most profitable ways of development and further functioning of the organization. As part of planning, the effectiveness of investment, production and financial activities is also forecast. 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 the purchase of tools, necessary materials and raw materials. When recalculated per 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 of expense changes 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 produce products of such a production volume and at such a cost that it can cover fixed costs that remain 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 in the manufacture of 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 change in quantitative terms and due to fluctuations in wage payments during growth or daily norms, as well as when the incentive share of payments is updated.
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 proportion of components.
4. The amounts of tax deductions also vary. may increase due to rising space costs 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, there will be no need to accrue unified social tax.

The above types of semi-fixed and semi-variable costs clearly demonstrate why these costs are considered conditional. During his work, the owner of the enterprise tries to influence changes in profits. For example, to reduce costs and increase profits, at the same time the market and other 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 for the company.

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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 items allows you to make 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 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 the cost of 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 produces, for example, gasoline, ethylene and fuel oil in one technological process, 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 costs of gasoline for transporting raw materials during oil refining are indirect, but for a transport company they are direct, since they are directly proportional to the volume of transportation. Wages of 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.

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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 volume, 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