VARIABLE EXPENSES: WHAT THEY CONSIST OF, CLASSIFICATION AND EXAMPLES - DUDAS - 2025

The variable expenses are corporate expenses that change in proportion to production. They increase or decrease according to the volume of production of a company; they increase as production increases and decrease as production decreases.

Therefore, the materials used as components of a product are considered variable expenses, since they vary directly with the number of units of the product manufactured.

Source es.m.wikipedia.org Author Nils R. Barth

The total expenses incurred by any business consist of fixed expenses and variable expenses. It is helpful to understand the proportion of variable expenses in a business, as a high proportion means that a business can continue to operate at a relatively low income level.

In contrast, a high proportion of fixed expenses requires a company to maintain a high level of income to stay in business.

Variable expenses are taken into account in profit projections and in calculating the breakeven point for a company or project.

What are variable expenses?

Variable expenses depend on production. It is a constant quantity per unit produced. Therefore, as production volume increases, variable expenses will also increase.

On the other hand, when fewer products are produced, the variable expenses associated with production will decrease accordingly.

Examples of variable expenses are sales commissions, cost of raw materials, and utility expenses. The formula for total variable expense is:

Total variable spending = Amount of output x Variable spending per unit of output.

Expenses and income

When analyzing the income statement, it should be remembered that increased expenses are not necessarily a cause for concern.

Each time sales increase, more units must be produced first (excluding the impact of a higher price), which means that variable expenses must also increase.

Therefore, for income to increase, expenses must also increase. However, it is important that income increase at a faster rate than expenses.

For example, if a company reports 8% volume growth, while the cost of merchandise sold only increases 5% in the same period, then expenses have likely decreased on a unit basis.

One way to check this aspect of the business is to divide variable expenses by total income, to calculate expenses as a percentage of sales.

List of variable and fixed expenses

A company with a large number of variable expenses, compared to fixed expenses, can show more consistent expenses per unit and therefore more predictable profit margins per unit than a company with fewer variable expenses.

However, a business with fewer variable expenses, and therefore a higher amount of fixed expenses, can increase potential profit or loss, because increases or decreases in income apply at a more constant level of expenses.

Classification

Expense is something that can be classified in various ways, depending on its nature. One of the most popular methods is to classify them into fixed expenses and variable expenses.

Some authors also include semi-variable expenses, which is the type of expense that has characteristics of fixed expenses and variable expenses.

Fixed expenses do not change with increases or decreases in the volume of units produced, while variable expenses depend solely on the volume of units produced.

The classification of expenses as variable or fixed is important for companies in management accounting, since they are used in various forms of analysis of financial statements.

Analysis of fixed and variable expenses

By analyzing the amounts of fixed and variable expenses, companies can make better decisions about whether to invest in property, plant and equipment.

For example, if a company incurs high direct labor expenses in manufacturing its products, it may look to invest in machinery to reduce these high variable expenses and incur more fixed expenses.

However, these decisions must also consider how many products are actually sold.

If the company were to invest in machinery and incur high fixed costs, it would only be beneficial in a situation where sales were high, to the extent that overhead fixed costs are less than total direct labor expenses if not I would have bought the machine.

If sales were low, even though unit labor expenses remain high, it would be better not to invest in machinery, incurring high fixed expenses, because low sales multiplied by high unit labor expenses would be even lower than the general fixed expense of the company. machinery.

Examples

Suppose it costs a bakery $ 15 to bake a cake: $ 5 for the raw materials, such as sugar, milk, butter, and flour, and $ 10 for the direct labor involved in baking the cake.

The following table shows how variable costs change as the number of cakes baked varies.

As the production of cakes increases, the variable expenses of the bakery also increase. When the bakery does not bake any cakes, its variable expense is zero.

Fixed expenses and variable expenses make up the total expense. This is a determinant of the profit of a company, calculated as:

Profits = Sales - Total Expenses.

A business can increase its profits by reducing its total expenses. Since fixed expenses are more difficult to reduce, most businesses seek to reduce their variable expenses.

Therefore, if the bakery sells each cake for $ 35, its gross profit per cake will be $ 35 - $ 15 = $ 20.

Net income

To calculate net profit, fixed expenses must be subtracted from gross profit. Assuming the bakery has monthly fixed expenses of $ 900, then your monthly profit will be:

A business incurs a loss when fixed expenses are higher than gross profits. In the case of the bakery, when you sell only 20 cakes a month, you have gross profit of $ 700 - $ 300 = $ 400.

Since your fixed expense of $ 900 is greater than $ 400, you would lose $ 500 in sales. The breakeven point occurs when the fixed expenses equal the gross margin, which does not generate gains or losses. In this case, the bakery sells 45 cakes with a total variable expense of $ 675.

A business looking to increase its profits by reducing variable expenses may need to reduce fluctuating expenses for raw materials, direct labor, and advertising.

However, the cost reduction should not affect the quality of the product. This would have an adverse effect on sales.

References

1. Investopedia (2018). Variable Cost. Taken from: investopedia.com.
2. Steven Bragg (2017). Examples of variable costs. Accounting Tools. Taken from: accountingtools.com.
3. Investing Answers (2018). Variable Costs. Taken from: investinganswers.com.
4. CFI (2018). Fixed and Variable Costs. Taken from: corporatefinanceinstitute.com.
5. Surbhi (2017). Difference Between Fixed Cost and Variable Cost. Key Differences. Taken from: keydifferences.com.