What is included in variable costs? Cost management and operational management decisions

You will need

• - Data on the volume of output in natural units
• - Accounting data on the costs of materials and components, equipment, wages, fuel and energy resources for the period.

Instructions

Based on documents on the write-off of raw materials and materials, acts on the performance of production work or services performed by auxiliary units or third-party organizations, determine the amount for production or services for. Exclude the amount of returnable waste from material costs.

Determine the amount of transportation and procurement costs and costs for packaging products.

By adding all the above sums, you will determine the common variables expenses for everything produced during the period. Knowing the number of products produced, by division, find the sum of variable costs per unit of production. Calculate the critical level of variable costs per unit of production using C–PZ/V, where C is the product price, PZ are constants expenses, V – volume of output in natural units.

note

In terms of taxes, fees, and other obligatory payments, the amount of which depends on the volume of production, a reduction in variable costs is possible only if the legislative framework is changed.

Helpful advice

A reduction in variable costs will result from an increase in labor productivity, a reduction in the number of employees in main and auxiliary production, a decrease in the volume of stocks of raw materials and finished products, economical use of materials, the use of energy-saving technological processes, and the introduction of progressive management schemes.

Sources:

• Practical magazine for accountants.
• what costs are not variable
• v - variable costs per unit of production, DE

What minimum capital you will need to start your own business depends on what exactly you want to open. But there are costs that are common to almost all types of business. Let's take a closer look at these costs.

Instructions

Currently, it is quite possible to open one with minimal or almost no investment. For example, online business. But if you are still inclined to the “traditional” form of business, then you can already identify at least three mandatory cost items: registration of a company or individual entrepreneur, rental of premises and purchase of goods (equipment).

If you are registering an LLC or individual entrepreneur, then all your costs are state fees and notary expenses. The state fee for registering a legal entity is currently 4,000 rubles. An individual can register himself as an entrepreneur by paying 800 rubles. Up to 1,500 rubles goes to the notary. However, by doing the registration yourself, you will save money, but will spend quite a lot of time, so it is more profitable to hire a specialized company to register your business. The company will register you for 5,000-10,000 rubles.

The cost of renting premises depends on the location of your office or. Accordingly, the closer to the center of Moscow or to elite areas, the higher the rental cost. On average, you will pay from $400 per year for one square meter of rented space. This will be the cost of a class C office (a fairly low class) in the Central Administrative District. The cost of renting a Class A office can reach up to $1,500 per square meter per year - depending on the location. A room measuring 200 sq.m in the same Central Administrative District will cost you on average around 500,000 rubles.

Equipment costs or (if you decide to open a store) depend, of course, on the type of business you run. In any case, you will need to equip your office with at least one computer (if you don’t have employees yet), a telephone and other office equipment, as well as “little things” - paper, stationery. Owners should take care of cash registers.

Sooner or later, your business will expand and you will need employees. Every office needs a secretary. His salary now starts at an average of 20,000 rubles per month. A part-time student can be hired for 15,000. Accordingly, the more qualified the employee, the more he will have to pay. Salaries of sellers and cashiers now start from 10,000-15,000 rubles, but this is the minimum for which low-skilled employees will work.

Sources:

• Small business website.

Variables are recognized costs, which directly depend on the volume of calculated production. Variables costs will depend on the cost of raw materials, materials, the cost of electrical energy, and the amount of wages paid.

You will need

• calculator
• notepad and pen
• a complete list of enterprise costs with the indicated amount of costs

Instructions

Add it all up costs enterprises that directly depend on the volume of products produced. For example, the variables of a trading company selling consumer goods include:
Pp – volume of products purchased from suppliers. Expressed in rubles. Let a trade organization purchase goods from suppliers in the amount of 158 thousand rubles.
Uh – to electric. Let a trade organization pay 3,500 rubles for .
Z – the salary of sellers, which depends on the quantity of goods they sell. Let the average wage fund in a trade organization be 160 thousand rubles. Thus, the variables costs trade organization will be equal to:
VC = Pp + Ee + Z = 158+3.5+160 = 321.5 thousand rubles.

Divide the resulting amount of variable costs by the volume of products sold. This indicator can be found by a trade organization. The volume of goods sold in the above example will be expressed in quantitative terms, that is, by piece. Suppose a trading organization was able to sell 10,500 units of goods. Then the variables costs taking into account the quantity of goods sold are equal to:
VC = 321.5 / 10.5 = 30 rubles per unit of goods sold. Thus, variable costs are made not only by adding the organization’s costs for the purchase and goods, but also by dividing the resulting amount by the unit of goods. Variables costs with an increase in the quantity of goods sold, they decrease, which may indicate efficiency. Variables depending on the type of company activity costs and their types may change - added to those indicated above in the example (costs of raw materials, water, one-time transportation of products and other expenses of the organization).

Sources:

• "Economic Theory", E.F. Borisov, 1999

Variables costs represent types of expenses, the value of which can change only in proportion to changes in the volume of production. They are contrasted with fixed costs, which add up to total costs. The main sign by which it is possible to determine whether any costs are variable is their disappearance when production stops.

Instructions

According to IFRS standards, there are only two types of variable costs: production variable indirect costs and production variable direct costs. Production variable indirect costs - which are almost or completely directly dependent on changes in volume, however, due to production technological features, they are not economically feasible or cannot be directly attributed to those produced. Production variable direct costs are those costs that can be directly attributed to specific products in the primary data. Indirect variable costs of the first group are: all the costs of raw materials necessary for complex production. Direct variable costs are: fuel and energy costs; expenses for basic materials and raw materials; workers' wages.

To find the average of the variables costs, you need shared variables costs divided by the required quantity of products produced.

Let's calculate the variables costs using an example: Price per unit of output A: materials - 140 rubles, wages for one manufactured product - 70 rubles, other costs - 20 rubles.
Price per unit of manufactured product B: materials - 260 rubles, wages for one manufactured product - 130 rubles, other costs - 30 rubles. Variables costs for one unit of product A will be equal to 230 rubles. (add up all costs). Accordingly, variable costs for one unit of product B will be equal to 420 rubles. Keep in mind that variable costs are always associated with the production of each unit of the product produced. Variables costs - those quantities that change only when the quantity of a given product changes and includes different types of costs.

Sources:

• how to open variables in 2019

In the absence of a real idea of ​​the material costs of producing goods (cost), it is impossible to determine the profitability of production, which, in turn, is a fundamental characteristic for the development of the business as a whole.

Instructions

Familiarize yourself with the three main methods of calculating material costs: boiler, custom and distribution. Select one of the methods, depending on the costing object. So, with the boiler method, such an object is production as a whole, in the case of the order method - only a separate order or type of product, and with the cross-cut method - a separate segment (technological process). Accordingly, everything material is either not, or correlated by products (orders), or by segments (processes) of production.

Use different units of calculation when using each costing method (natural, conditionally natural, cost, time and work units).

When using the boiler calculation method, do not forget about its low information content. The information obtained in boiler calculations can only be justified in the case of accounting for single-product production (for example, at mining enterprises to calculate its cost). Material expenses are calculated by dividing the total amount of existing costs by the entire volume of production in physical terms (barrels of oil in question).

Use the order-to-order method per unit of production for small-scale or even single-piece production. This method is also well suited for calculating the cost of large or technologically complex products, when each segment of the production process is physically impossible. Material expenses are calculated by dividing the cost of each order by the number of units produced and delivered in accordance with that order. The result of calculating the cost using this method is to obtain information about the implementation of each order.

Use the incremental method if you are the cost of production in mass production, characterized by a sequence of technological processes and repeatability of individual operations. Material expenses are calculated by dividing the sum of all costs for a certain period of time (or for the duration of each individual process or operation) by the number of units of products produced for this period (or for the duration of the process or operation). The total cost of production is the sum of material costs for each of the technological processes.

In production, there are costs that remain the same even with hundreds or tens of thousands of dollars in profit. They do not depend on the volume of products produced. These are called fixed costs. How to calculate fixed costs?

Instructions

Determine the formula for calculating fixed costs. It calculates the fixed costs of all organizations. The formula will be equal to the ratio of all fixed expenses to the total cost of work and services sold, multiplied by the basic income from the sale of work and services.

Calculate in non-current assets deductions for depreciation of fixed assets, such as land plots, land improvements, buildings, structures, transmission devices, machinery and equipment, etc. Don’t forget about library collections, natural resources, rental items, as well as capital investments in facilities that have not been put into operation.

Calculate the entire cost of completed work and services. This will include revenue from the main sale or from services provided, for example, and work performed, for example, for construction organizations.

Calculate the basic income from the sale of works and services. Basic income is the conditional profitability for the month in value terms per unit of physical indicator. Please note that services classified as “domestic” have a single physical indicator, and services of a “non-domestic” nature, for example, housing rental and passenger transportation, have their own physical indicators.

Substitute the obtained data into the formula and get fixed costs.

In the process of economic activity of organizations, some managers are forced to send their employees on business trips. In general, the concept of “business trip” is a trip outside the workplace to resolve work-related issues. As a rule, the decision to send an employee on a business trip is made by the general director. The accountant must calculate and subsequently pay the employee travel allowances.

You will need

• - production calendar;
• - time sheet;
• - pay slips;
• - tickets.

Instructions

To calculate travel allowances, calculate the employee's average daily earnings for the last 12 calendar months. If wages are different every month, then first determine the total amount of all payments for the billing period, including bonuses and allowances in this number. Please note that any financial assistance, as well as cash payments in the form of gifts, must be deducted from the total amount.

Calculate the actual number of days worked over 12 months. Please remember that this number does not include weekends and holidays. If for any reason, even if it is valid, the employee was not present at the workplace, then exclude these days as well.

Then divide the amount of payments for 12 months by the days actually worked. The resulting number will be the average daily earnings.

For example, manager Ivanov worked for the period from September 1, 2010 to August 31, 2011. According to the production calendar, with a five-day work week, the total number of days in the billing period is 249 days. But Ivanov took a vacation at his own expense in 2011, the duration of which was 10 days. Thus, 249 days – 10 days = 239 days. During this period, the manager earned 192 thousand rubles. To calculate the average daily earnings you need to divide 192 thousand rubles by 239 days, you get 803.35 rubles.

After the average daily earnings have been calculated, determine the number of business trip days. The beginning and end of a business trip is the date of departure and arrival of the vehicle.

Calculate travel allowances by multiplying your average daily earnings by the number of travel days. For example, the same manager Ivanov was on a business trip for 12 days. Thus, 12 days * 803.35 rubles = 9640.2 rubles (travel allowances).

Video on the topic

In the process of economic activity, company managers spend money on certain needs. All these expenses can be divided into two groups: variables and permanent. The first group includes those costs that depend on the volume of products produced or sold, while the second group does not change depending on the volume of production.

Instructions

To determine variables costs, look at their purpose. For example, you purchased some material that goes into the production of products, that is, it directly takes part in the production. Let it be wood from which lumber of various sections is made. The volume of lumber produced will depend on the amount of wood purchased. Such expenses classified as variables.

In addition to wood, you use electricity, the amount of which also depends on the volume of production (the more you produce, the more you spend), for example, when working with a sawmill. All expenses that you pay to the electricity supply company are also classified as variable costs.

To produce products, you use labor, which must be paid wages. These expenses classify them as variables.

If you do not have your own production, but act as an intermediary, that is, you resell previously purchased goods, then classify the total cost of the purchase as variable expenses.

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, 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 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.

The production costs of a business can be divided into two categories: variable and fixed costs. Variable costs depend on changes in production volume, while constant costs remain fixed. Understanding the principle of classifying costs into fixed and variable is the first step to managing costs and improving production efficiency. Knowing how to calculate variable costs will help you reduce your unit costs, making your business more profitable.

Steps

Calculation of variable costs

Classify costs into fixed and variable. Fixed costs are those costs that remain unchanged when production volume changes. For example, this may include rent and salaries of management personnel. Whether you produce 1 unit or 10,000 units in a month, these costs will remain approximately the same. Variable costs change with changes in production volume. For example, these include the costs of raw materials, packaging materials, product delivery costs and wages of production workers. The more products you produce, the higher your variable costs will be.

Add together all the variable costs for the time period in question. Having identified all variable costs, calculate their total value for the analyzed period of time. For example, your manufacturing operations are fairly simple and involve only three types of variable costs: raw materials, packaging and shipping costs, and worker wages. The sum of all these costs will be the total variable costs.

• Let’s assume that all your variable costs for the year in monetary terms will be as follows: 350,000 rubles for raw materials and supplies, 200,000 rubles for packaging and delivery costs, 1,000,000 rubles for workers’ wages.
• Total variable costs for the year in rubles will be: 350000 + 200000 + 1000000 (\displaystyle 350000+200000+1000000), or 1550000 (\displaystyle 1550000) rubles These costs directly depend on the volume of production for the year.

1. Divide total variable costs by production volume. If you divide the total amount of variable costs by the volume of production over the analyzed period of time, you will find out the amount of variable costs per unit of production. The calculation can be represented as follows: v = V Q (\displaystyle v=(\frac (V)(Q))), where v is the variable cost per unit of output, V is the total variable cost, and Q is the volume of production. For example, if in the above example the annual production volume is 500,000 units, then the variable cost per unit would be: 1550000 500000 (\displaystyle (\frac (1550000)(500000))), or 3, 10 (\displaystyle 3,10) ruble

   Using variable cost information in practice

   1. Assess trends in variable costs. In most cases, increasing production volume will make each additional unit produced more profitable. This is because fixed costs are spread over more units of production. For example, if a business that produced 500,000 units of product spent 50,000 rubles on rent, these costs in the cost of each unit of production amounted to 0.10 rubles. If the production volume doubles, then the rental costs per unit of production will already be 0.05 rubles, which will allow you to get more profit from the sale of each unit of goods. That is, as sales revenue increases, the cost of production also increases, but at a slower pace (ideally, in the unit cost of production, the variable costs per unit should remain unchanged, and the component of the fixed costs per unit should fall).

      Use the percentage of variable costs in the cost price to assess risk. If you calculate the percentage of variable costs in the unit cost of production, you can determine the proportional ratio of variable and fixed costs. The calculation is made by dividing the variable costs per unit of production by the cost per unit of production using the formula: v v + f (\displaystyle (\frac (v)(v+f))), where v and f are respectively variable and fixed costs per unit of production. For example, if fixed costs per unit of production are 0.10 rubles, and variable costs are 0.40 rubles (with a total cost of 0.50 rubles), then 80% of the cost is variable costs ( 0.40 / 0.50 = 0.8 (\displaystyle 0.40/0.50=0.8)). As an outside investor in a company, you can use this information to assess the potential risk to the company's profitability.

      Conduct a comparative analysis with companies in the same industry. First, calculate your company's variable costs per unit. Then collect data on the value of this indicator from companies in the same industry. This will give you a starting point for assessing your company's performance. Higher variable costs per unit may indicate that a company is less efficient than others; whereas a lower value of this indicator can be considered a competitive advantage.

      • The value of variable costs per unit of output above the industry average indicates that the company spends more money and resources (labor, materials, utilities) on production than its competitors. This may indicate its low efficiency or the use of too expensive resources in production. In any case, it will not be as profitable as its competitors unless it cuts its costs or increases its prices.
      • On the other hand, a company that is able to produce the same goods at a lower cost realizes a competitive advantage in earning a greater profit from the set market price.
      • This competitive advantage may be based on the use of cheaper materials, cheaper labor or more efficient production facilities.
      • For example, a company that purchases cotton at a lower price than other competitors can produce shirts with lower variable costs and charge lower prices for the products.
      • Public companies publish their reports on their websites, as well as on the websites of the exchanges on which their securities are traded. Information about their variable costs can be obtained by analyzing the "Income Statements" of these companies.

   2. Conduct a break-even analysis. Variable costs (if known) combined with fixed costs can be used to calculate the break-even point for a new manufacturing project. The analyst is able to draw a graph of the dependence of fixed and variable costs on production volumes. With its help, he will be able to determine the most profitable level of production.

As we remember, we need a business plan not only to understand the goals and ways to achieve them, but also to justify the profitability and possibility of implementing our investment project.

When making calculations for a project, you come across the concept of fixed and variable costs, or expenses.

What are they and what is their economic and practical meaning for us?

Variable expenses, by definition, are those expenses that are not constant. They change. And the change in their value is associated with the volume of products produced. The higher the volume, the higher the variable costs.

What cost items are included in them and how to calculate them?

All resources that are spent on production can be classified as variable costs:

• materials;
• components;
• employees' wages;
• electricity consumed by a running machine engine.

The cost of all the necessary resources that must be spent to produce a certain volume of output. These are all material costs, plus wages of workers and maintenance personnel, plus the cost of electricity, gas, water spent in the production process, plus packaging and transportation costs. This also includes the costs of creating stocks of materials, raw materials and components.

Variable costs need to be known per unit of output. Then we can calculate at any time the total amount of variable costs for a certain period of time.
We simply divide the estimated cost of production by the volume of production in physical terms. We obtain variable costs per unit of production.

This calculation is made for each type of product and service.

How does unit costing differ from the variable cost of producing one product or service? Fixed costs are also included in the calculation.

Fixed costs are almost independent of production volumes.

These include:

• administrative expenses (costs of maintaining and renting offices, postal services, travel expenses, corporate communications);
• production maintenance costs (rent of production premises and equipment, machine maintenance, electricity, space heating);
• marketing expenses (product promotion, advertising).

Fixed costs remain constant until a certain point when production volume becomes too large.

An important step for determining variable and fixed costs, as well as the entire financial plan, is the calculation of personnel costs, which can also be carried out at this stage.

Based on the data we received in the organizational plan on structure, staffing, operating hours, as well as focusing on the data from the production program, we calculate personnel costs. We make this calculation for the entire period of the project.

It is necessary to determine the amount of remuneration for management personnel, production and other employees, as well as the total amount of expenses.

Don’t forget to take into account taxes and social contributions, which will also be included in the total amount.

All data is presented in tabular form for ease of calculation.

Knowing fixed and variable costs, as well as product prices, you can calculate the break-even point. This is the level of sales that ensures the enterprise’s self-sufficiency. At the break-even point, there is equality in the sum of all costs, fixed and variable, and the income from the sale of a certain volume of products.

Analysis of the break-even level will allow us to draw a conclusion about the sustainability of the project.

An enterprise should strive to reduce variable and fixed costs per unit of production, but this is not a direct indicator of production efficiency. It is necessary to take into account the specifics of the enterprise. High-tech industries may have high fixed costs, while low ones may occur in underdeveloped ones with old equipment. This can also be observed when analyzing variable costs.

The main goal of your company is to maximize economic profit. And this is not only cutting costs in any way, but also using various tools to reduce production and management costs through the use of more productive equipment and increased labor productivity.

Conditionally fixed and conditionally variable costs

In general, all types of costs can be divided into two main categories: fixed (conditionally fixed) and variable (conditionally variable). According to the legislation of the Russian Federation, the concept of fixed and variable costs is present in paragraph 1 of Article 318 of the Tax Code of the Russian Federation.

Conditionally fixed costs(English) total fixed costs) - an element of the break-even point model, representing costs that do not depend on the volume of output, contrasted with variable costs, which add up to total costs.

In simple terms, these are expenses that remain relatively unchanged during the budget period, regardless of changes in sales volumes. Examples are: administrative expenses, expenses for rent and maintenance of buildings, depreciation of fixed assets, expenses for their repairs, time wages, on-farm deductions, etc. In reality, these expenses are not constant in the literal sense of the word. They increase with the increase in the scale of economic activity (for example, with the advent of new products, businesses, branches) at a slower pace than the growth of sales volumes, or they grow spasmodically. That's why they are called conditionally constant.

This type of cost largely overlaps with overhead, or indirect costs that accompany the main production, but are not directly related to it.

Detailed examples of semi-fixed costs:

• Interest for obligations during the normal operation of the enterprise and maintaining the volume of borrowed funds, a certain amount must be paid for their use, regardless of the volume of production, however, if the volume of production is so low that the enterprise is preparing for bankruptcy , these costs can be neglected and interest payments can be stopped
• Enterprise property taxes , since its value is quite stable, are also mainly fixed expenses, however, you can sell property to another company and rent it from it (form leasing ), thereby reducing property tax payments
• Depreciation deductions using the linear method of accrual (evenly for the entire period of use of the property) in accordance with the selected accounting policy, which, however, can be changed
• Payment security, watchmen , despite the fact that it can be reduced by reducing the number of workers and reducing the load on checkpoints , remains even if the enterprise is idle, if it wants to preserve its property
• Payment rental depending on the type of production, duration of the contract and the possibility of concluding a sublease agreement, it can act as a variable cost
• Salary management personnel under conditions of normal functioning of the enterprise is independent of production volumes, however, with the accompanying restructuring of the enterprise layoffs ineffective managers can also be reduced.

Variable (conditionally variable) costs(English) variable costs) are expenses that change in direct proportion in accordance with the increase or decrease in total turnover (sales revenue). These costs are associated with a business's operations to purchase and deliver products to consumers. This includes: the cost of purchased goods, raw materials, components, some processing costs (for example, electricity), transportation costs, piecework wages, interest on loans and borrowings, etc. They are called conditional variables because their direct proportional dependence on sales volume actually exists only during a certain period. The share of these costs may change over a certain period (suppliers will raise prices, the rate of inflation of selling prices may not coincide with the rate of inflation of these costs, etc.).

The main sign by which you can determine whether costs are variable is their disappearance when production stops.

Variable Cost Examples

In accordance with IFRS standards, there are two groups of variable costs: production variable direct costs and production variable indirect costs.

Manufacturing variable direct costs- these are expenses that can be attributed directly to the cost of specific products based on primary accounting data.

Manufacturing Variable Indirect Costs- these are expenses that are directly dependent or almost directly dependent on changes in the volume of activity, however, due to the technological features of production, they cannot or are not economically feasible to be directly attributed to the manufactured products.

Examples direct variables costs are:

• Costs of raw materials and basic materials;
• Energy costs, fuel;
• Wages of workers producing products, with accruals for it.

Examples indirect variables costs are the costs of raw materials in complex production. For example, when processing raw materials - coal - coke, gas, benzene, coal tar, and ammonia are produced. When milk is separated, skim milk and cream are obtained. It is possible to divide the costs of raw materials by type of product in these examples only indirectly.

Break even (BEP - break-even point) - the minimum volume of production and sales of products at which costs will be offset by income, and with the production and sale of each subsequent unit of product the enterprise begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or taking into account the expected profit margin.

Break-even point in monetary terms- such a minimum amount of income at which all costs are fully recouped (profit is equal to zero).

BEP = * Revenue from sales

Or, which is the same thing BEP = = *P (see below for explanation of meanings)

Revenue and costs must relate to the same period of time (month, quarter, six months, year). The break-even point will characterize the minimum acceptable sales volume for the same period.

Let's look at the example of a company. Cost analysis will help you clearly determine BEP:

Break-even sales volume - 800/(2600-1560)*2600 = 2000 rubles. per month. Actual sales volume is 2600 rubles/month. exceeds the break-even point, this is a good result for this company.

The break-even point is almost the only indicator about which we can say: “The lower, the better. The less you need to sell to start making a profit, the less likely it is to go bankrupt.

Break-even point in units of production- such a minimum quantity of products at which the income from the sale of these products completely covers all the costs of its production.

Those. It is important to know not only the minimum allowable revenue from sales as a whole, but also the necessary contribution that each product should bring to the total profit - that is, the minimum required number of sales of each type of product. To do this, the break-even point is calculated in physical terms:

VER = or VER = =

The formula works flawlessly if the enterprise produces only one type of product. In reality, such enterprises are rare. For companies with a large range of production, the problem arises of allocating the total amount of fixed costs to individual types of products.

Fig.1. Classic CVP analysis of the behavior of costs, profits and sales volume

Additionally:

BEP (break-even point) - break even,

TFC (total fixed costs) - the value of fixed costs,

V.C.(unit variable cost) - the value of variable costs per unit of production,

P (unit sale price) - cost of a unit of production (sales),

C(unit contribution margin) - profit per unit of production without taking into account the share of fixed costs (the difference between the cost of production (P) and variable costs per unit of production (VC)).

C.V.P.-analysis (from the English costs, volume, profit - expenses, volume, profit) - analysis according to the “costs-volume-profit” scheme, an element of managing the financial result through the break-even point.

Overhead- costs of conducting business activities that cannot be directly correlated with the production of a specific product and therefore are distributed in a certain way among the costs of all produced goods

Indirect costs- costs that, unlike direct ones, cannot be directly attributed to the manufacture of products. These include, for example, administrative and management costs, costs for staff development, costs in production infrastructure, costs in the social sphere; they are distributed among various products in proportion to a justified base: the wages of production workers, the cost of materials consumed, the volume of work performed.

Depreciation deductions- an objective economic process of transferring the value of fixed assets as they wear out to the product or services produced with their help.

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