Analysis of company performance is an extremely important event. This allows you to identify negative trends that inhibit development, and eliminate them. The formation of cost is an important process on which the receipt of the company's net profit depends. In this matter, it is important to know what variable costs are, how they affect the performance of the enterprise. Their analysis applies certain formulas and approaches. How to find out the value of variable costs, how to interpret the result of the study, you should find out more.
general characteristics
Variable Costs (VC) are organizational costs that change in quantity accordingly volume of production. If the company ceases to function, then this figure will be zero.
The composition of variable costs includes such types of costs as raw materials, fuel, energy resources for production. This also includes the salary of key employees (part that depends on the implementation of the plan) and sales managers (percentage for implementation).
This also includes tax fees, which have as their basis for calculating the size of products sold. These are VAT, stocks, tax on the simplified tax system, the unified social tax, etc.
By calculating the variable costs of the enterprise, you can increase the profitability of the company subject to the competent optimization of all factors influencing them.
Effect of sales volume
There are different types of variable costs. They differ in determining signs and form certain groups. One of these classification principles is the breakdown of variable costs by sensitivity to the impact of sales volumes on them. They are of the following types:
- Proportional costs. Their response rate to changes in production volume (elasticity) is 1. That is, they grow in the same way as sales.
- Progressive costs. Their elasticity is greater than 1. They increase faster than the volume of production. This is a high sensitivity to changing conditions.
- Agressive costs respond to changes in sales volumes more slowly. Their sensitivity to such changes is less than 1.
It is necessary to take into account the degree of response of changes in costs to an increase or decrease in product output when conducting an adequate analysis.
Other varieties
There are several more signs of classifying this type of cost. On a statistical basis, the variable costs of the organization are general and average. The former include all variable costs for the full range of products, and the latter are determined per unit of output or a specific group of products.
Based on the attribute to the cost price, variable costs can be direct or indirect. In the first case, the costs directly relate to the price of sales. The second type of cost is difficult to assess for attributing them to cost. For example, in the process of producing skim milk and cream, finding the cost for each of these items is quite problematic.
Variable costs can be production or non-production. The first includes the costs of raw materials, fuel, materials, salaries and energy resources. To non-productive variable costs should include management, business expenses.
Payment
To make the calculation of variable costs, a number of formulas are used. Their detailed study will help to understand the essence of the category in question.There are several approaches to the analysis of the indicator. Variable costs, the formula of which is most often used in production, look like this:
ПЗ = Materials + Raw materials + Fuel + Electricity + Salary bonus + Percentage for sales to sales representatives.
There is another approach to assessing the presented indicator. It looks like this:
PZ = Gross (margin) profit - fixed costs.
This formula emerges from the assertion that the total costs of the enterprise are found by summing fixed and variable costs. Using one of two approaches, you can assess the state of the indicator in the enterprise. However, in order to evaluate the factors affecting the variable part of costs, it is better to use the first type of calculation.
Break even
Variable costs, the formula of which was presented above, play an important role in determining break-even points organization.
At a certain point of equilibrium, the company produces a volume of production at which the magnitude of profit and costs. At the same time, the company's net profit is 0. The marginal profit at this level corresponds to the sum of fixed costs. This is the breakeven point.
It shows the minimum acceptable level of income at which the company will be profitable. Based on such a study, the analytical service should determine the safe area in which the minimum acceptable level of sales will be carried out. The higher the figures from the breakeven point, the greater the indicator of the stability of the organization and its investment rating.
How to apply calculations
When calculating variable costs, you should take into account the determination of the breakeven point. This is due to a certain pattern. As variable costs increase, the breakeven point shifts. The profitability zone at the same time moves even higher on the schedule. With an increase in production costs, the company should produce a larger volume of products. And the cost of this product will also be higher.
In ideal calculations, linear relationships are used. But when conducting research in real production conditions, a nonlinear dependence can be observed.
For the model to work accurately, it must be applied in short-term planning and for sustainable categories of goods that are not dependent on demand.
Cost Reduction Ways
To reduce variable costs, several ways to influence the situation can be considered. It is possible to take advantage of the effect of increasing production. With a significant increase in production, the change in variable costs becomes non-linear. At a certain point, their growth slows down. This is the point of refraction.
This happens for several reasons. Initially, management costs are reduced. With such events, it is possible to conduct research and introduce technological innovations into the production process. Defective size is reduced, product quality is improved. A more complete capacity utilization also has a positive effect on the indicator.
Having become familiar with such a concept as variable costs, you can correctly use the methodology for their calculation in determining the ways of enterprise development.
