Fixed and variable costs in production

Financial planning is necessary for the normal functioning of any company, forecasting production efficiency and profitability of all areas of activity. Its basis is a detailed analytical picture of all revenues and costs incurred, which are classified as fixed and variable costs. What these terms mean, on what grounds are the distribution of costs in the organization and why there is a need for such a separation, this article will tell.

What is the cost of production

Cost components of any product are costs. All of them differ in the features of formation, composition, distribution, depending on the production technology and available capacities. It is important for an economist to separate them by cost elements relevant articles and place of origin.

Classify expenses into different categories. For example, they are direct, that is, incurred directly during the production of the product (materials, work of machines, the cost of energy and the salary of shop personnel), and indirect, proportionally distributed over the entire range of products. These include costs that ensure the maintenance and functionality of the company, for example, the continuity of the process, utilities, salaries of auxiliary and managerial units.

In addition to such a separation, costs are divided into fixed and variable. We will consider them in detail.

Fixed production costs

Costs, the value of which does not depend on the volume of output, are called constant. They usually comprise the costs that are vital for the normal implementation of the production process. These are expenses on energy carriers, rental of workshops, heating, marketing research, AUR and other expenses of general purpose. They are constant and do not change even with short downtimes, because the lessor charges a rental fee in any case, regardless of the continuity of production.

Despite the fact that fixed costs remain unchanged for a certain (predetermined) period of time, fixed costs per unit of output vary in proportion to the volume produced. For example, fixed costs amounted to 1000 rubles, 1000 units of the product were produced, therefore, in each unit of production 1 ruble of fixed costs. But if not 1000, but 500 units of a product are produced, then the share of fixed costs in a unit of goods will be 2 rubles.

When fixed costs change

It should be noted that fixed costs are not always constant, since companies develop production capacities, update technologies, and increase the area and number of employees. In such cases, fixed costs also vary. When conducting an economic analysis, it is necessary to take into account short periods when fixed costs remain constant. If an economist needs to analyze the situation over a long period of time, it is more expedient to divide it into several short time periods.

Variable costs

In addition to the fixed costs of the enterprise, there are variables. Their value is a value that changes with fluctuations in output volumes. Variables include expenses:

• based on materials used in the production process;

• on wages of shop workers;

• insurance contributions with payroll;

• depreciation of workshop equipment;

• on the operation of vehicles engaged directly in production, etc.

Variable costs vary in proportion to the quantity of goods released. For example, a 2-fold increase in production is not possible without a double increase in total variable costs. However, the costs per unit of output will remain unchanged. For example, with the variable costs of producing one unit of a product at 20 rubles, 40 rubles would be required to produce two units.

Fixed costs, variable costs: dividing by elements

All costs — fixed and variable — comprise the total costs of the enterprise. To correctly reflect the costs in accounting, to calculate the sale value of the manufactured product and to carry out an economic analysis of the company's production activities, they are all taken into account by cost elements, dividing them into:

• stocks, materials and raw materials;
• staff remuneration;
• insurance contributions to funds;
• depreciation of fixed and intangible assets;
• others.

All expenses distributed by elements are grouped by cost items and are taken into account in the categories of fixed or variable.

Cost Calculation Example

Let us illustrate how costs behave depending on changes in the volume of production.

Analyzing the change in the price of the product, the economist concludes: fixed costs did not change in January, the variables increased in proportion to the increase in output, and the cost of the product decreased. In the presented example, the reduction in the price of goods is due to the invariability of fixed costs. Predicting changes in costs, the analyst can calculate the cost of the product in a future reporting period.