Companies that run their business, incur costs, one of which is called variable costs. These costs are needed starting from the production process until the product is ready to be launched in the market. What exactly is the definition of this variable cost?
- 1 Variable cost meaning
- 2 Variable cost and fixed cost example
- 3 Variable cost per unit formula
- 4 Are variable costs controllable?
- 5 Are variable costs always relevant?
- 6 Variable cost as a percentage of sales
- 7 Can the variable cost be negative?
- 8 Do variable costs exist in the long run?
- 9 What is variable cost Class 11?
- 10 Does salary variable cost?
- 11 Conclusion
Variable cost meaning
In simple terms, the definition of variable cost is a cost that varies according to the conditions of a company’s production level. This means that the amount of these costs depends on the number of production.
Variable costs are constant amounts per unit produced. When the amount of production and output increases, the variable cost will also increase. Conversely, when the amount of production decreases, the variable costs associated with production will decrease.
More clearly, the definition of variable costs are costs incurred by a company in a changing manner based on changes in the number of products produced.
It can also be said that variable costs depend on fluctuations in business activities in producing goods by a company. Variable costs generally differ from one business sector or industry to another.
Variable cost types
Broadly speaking, variable costs are divided into three types.
Direct costs are costs that are directly related to production. The provisions of this direct cost are the costs required in the production process, for example for raw materials or fuel.
Variable overhead costs
Variable overhead costs are costs related to the intensity of the company related to the production process. For example, insurance costs for sick workers or accidents that occur during production.
Semi variable cost
Semi variable cost means a mixed cost that contains fixed cost and a variable cost in it. This element is the minimum cost to be able to provide services, while the variable cost element is a part that is influenced by the volume of activity.
In a cost report to present costs in the production process. a company usually uses a variable cost ratio which represents a percentage of net sales. How to calculate the variable cost ratio by dividing the amount of revenue generated by costs in production.
Fixed cost definition
The definition of fixed cost is the cost spent by the company in a fixed state or generally does not change even though there is an increase or decrease in the number of goods or services produced.
In contrast to variable costs, fixed costs are not at all affected by changes in business activities carried out by the company. However, although fixed costs are costs that do not change, in the future they may change.
For example, the cost of renting an office room or land. Which some time in the future will increase due to the asked from the owner.
Meanwhile, fixed costs are generally divided into two categories.
Committed Fixed Cost
This is a predetermined type of fixed cost. These costs are costs incurred in maintaining the stability of a company. This is closely related to the organizational structure and investment in company facilities.
Discretionary Fixed Cost
These are expenses that are spent at certain times that are reduced or eliminated without any impact on the profit generated. This makes management need to reduce discretionary costs when the company is hit by short-term cash shortages.
Variable Cost function
Following are some functions:
- Help control the company’s costs. This will separate the fixed costs so that the company can focus on the behavior of the fixed costs as a whole.
- Easier to limit useful contributions. This will make it easier for the company to know the contribution limit which is useful in determining the plan for the amount of profit based on volume, cost, and profit. Thus, the company is more able to control the current operating conditions and can make the right decisions.
- Help set the assessment. It can help to determine the effectiveness of the ongoing production of an item. Furthermore, the company can also carry out accountability easily to other departments in management.
Variable cost and fixed cost example
Example Variable Cost
- Raw materials. These raw materials are directly related to the production process.
- Direct workers. Some companies employ workers only temporarily, this becomes a variable cost. While workers with permanent employee status, are not included in the variable cost.
- Procurement of production equipment. It is included in a variable cost. Although it is not directly related to the production process.
- Overtime pay. For employees with hours of work based on hours, overtime pay can be a variable cost. In fact, not all companies apply the same working hours.
- Commission. There are companies that offer a commission per sale. This is a variable cost because usually the commission is calculated for every successful sale of a product with a certain amount.
- Shipping costs. Shipping products outside of geography will add costs, this includes variable costs.
Fixed Cost Example
- Credit interest. As adding capital, maybe Companies take loan money from banks. and this applies to paying a fixed amount of interest.
- Insurance fee. Companies that are members of insurance must pay premiums whose value is fixed.
- Rental Costs. Companies that rent properties such as offices, warehouses, are required to pay rental fees which are fixed costs.
- Tax Property. Tax fees are charged to a business or company based on the assets owned.
- Shrinkage. This is a gradual and systematic assignment of the cost of tangible assets.
- Payroll. The company pays its employees regularly, either daily, weekly or monthly which is a fixed cost.
- Utilities. Bills for electricity, phone, and so on. Indeed this includes variables, utilities are included in fixed costs.
Variable cost per unit formula
Variable cost per unit=Total variable costs/Number of units produced
The formula above is to determine the cost of variable cost per unit. The first is to calculate the total variable cost, then divide it by the total product produced. You can do this by subtracting the total cost from the fixed cost, if not yet known amount of variable cost.
A simple example of calculating the variable cost per unit with the above formula. Say you own a shoe factory. You know the total variable cost is $4000, and in one month you can produce 400 pairs of shoes.
Then we get the result the variable cost per unit based formula:
4000/100 = $40.
Are variable costs controllable?
Variable cost is still controllable because it will be related to the number of products produced so that the total cost follows the amount of production.
While fixed costs are less controllable, and they become routine expenses, such as staff wages, office rent costs, they are definite expenses even though production decreases.
Are variable costs always relevant?
Variable costs are relevant costs. The company incurs variable costs and produces according to the amount it produces.
A small example, a company that calls direct labor to complete a production, say shoes. Direct labor usually earns wages as a commission that are calculated per unit. Let say, one direct labor finishes one shoe, he gets a commission for $5.
In a day able to finish 10 shoes, then the company pays $50. And it is a relevant variable cost. So if direct labor is able to finish 15 shoes a day. He will get increased commissions and that’s a relevant cost.
Variable cost as a percentage of sales
Variable cost is also useful for expressing the percentage of net sales by calculating the ratio of variable costs to the net income of a company.
The ratio percentage is calculated based on the formula by dividing the variable costs by the company’s net income.
How to calculate the variable cost ratio. Take for example a company that creates a product with a variable cost of $10. And sales per unit of that product are $100.
So, based on the variable cost ratio formula, that is:
Ratio variable cost = Variable cost/ net sales
The result is 10/100 = 0.1 or 10%.
Besides calculating the ratio of variable costs per product, it is also possible to calculate based on time periods. For example, in a month the company spends $1,000 on a variable cost, and in that month the company generates $10,000 in net sales. Then based on a calculation using the formula we will get the result 0.1 or 10% by 1000/10000=0.1 or 10%.
By looking at the variable cost ratio, the company can determine the company’s overall profitability. Low ratio measure of the desired balance of total profit. So that the increase in profit is faster than the increase in costs.
Can the variable cost be negative?
In practice, variable costs are never negative or zero, where the average variable cost will depend on the company’s output.
To calculate the average variable cost, use a formula that is also very simple, by dividing the variable cost by the quantity of output.
Average Variable Cost=Variable cost/quantity output
With one simple example, if a firm in output quantity is 1 with variable costs of $5, then the average variable cost is 5/1=5. Hence the average variable cost is $5.
If in a company with an output quantity of 2 with a variable cost of 8, the average variable cost becomes 8/2=4. This means that each product costs an average of $4.
Average Variable Cost or in short as AVR is often presented in a curve. Which can form the shape like the letter “U”. It represents a decrease in cost margin and an increase in cost margin for each quantity of output in the firm.
In general, if the average cost decreases, while as output begins to increase, the average cost curve also increases. Companies use the data to estimate production increases or decreases in production.
When the price of the product is higher than the AVC of the good. I will bring the company to bear all variable costs and fixed costs. In this case, the company continues production. On the other hand, if the price of the good is lower than AVC, the firm will stop production to avoid additional variables.
Do variable costs exist in the long run?
Variable costs will exist in the long run, because it is directly related to the production process of a company. However, the variable cost is possible to increase or decrease based on the company’s total output.
But, the definition of variable cost long-term is different from the notion of long-run cost and short-run cost.
Long-run cost involves how to calculate with a certain formula for expectations long-term profits. It does not involve fixed costs in its calculations. Meanwhile, the short-run cost calculates the entire production process. Short-run costs involve variable costs and do not take into account fixed costs.
What is variable cost Class 11?
In accounting education, variable costs are often discussed in class 11. This is just a categorization of accounting learning classes in stages in the world of education in schools. Thus, it is using a tiered level for students in studying accounting from each class.
How do you calculate the variable cost in Class 11?
To calculate the total variable costs in economics class 11 accounting, use the formula:
Total variable cost= The total quantity of output x Variable cost per unit of output.
Meanwhile, to calculate the break-even point using the formula:
Break-even point(BEP) in units=Fixed costs / (Sales price per unit–Variable cost per unit).
By using variable cost, the company can also find out the break-even point of the product produced.
Does salary variable cost?
It depends on how a company treats employees. A company that applies for employs workers with a fixed salary. It is regardless of the hours worked. Then the salary is included in the fixed cost.
However, if an employee works counted per hour, then it is included in the variable cost category. Other companies may provide a fixed salary and they pay overtime pay that is calculated hourly as a commission. So this is a mixture of fixed costs and variable costs.
Variable cost is a company’s expenditure that is an important concern. Because looking at the average variable costs remains useful to take into account the company’s performance.
Average variable costs are usually represented on a curve that practically never reaches zero or is negative.
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