Variable costs, also referred to as variable expenses or fluctuating costs, are expenses that directly fluctuate in response to changes in production volume. These costs can be broadly categorized into two groups: fixed costs, which remain constant regardless of production levels, and variable costs, which rise or fall in direct correlation to production quantities. Put simply, variable costs are those expenses that adjust in proportion to the quantity of items manufactured or sold. Examples of variable costs encompass expenses like raw materials and other outlays that are contingent upon sales volume. It's important to note that Variable Costs require recalibration after each batch of products has been manufactured and delivered. Some illustrative examples of variable costs include:
Fixed Costs
Fixed costs remain unaltered irrespective of the quantity of goods manufactured or sold. Expenses such as rent, insurance, and interest payments are considered fixed costs. They remain unaffected by production or sales levels as they are independent of output. These costs are labeled as "fixed" because they are anticipated to remain consistent over an extended period, regardless of fluctuations in production. Fixed costs do not fluctuate in response to the amount of labor employed or the number of fixed assets in use.
Direct Labor
Direct labor pertains to the compensation provided to employees who are directly engaged in the manufacturing process. It is typically expressed as a percentage of the product's selling price. The calculation of this percentage is the responsibility of the production manager, who must take into account the nature of the product being produced. Direct labor encompasses the time required for each unit's manufacture, the labor involved in producing each unit, and the estimated number of units to be manufactured during the production run. This estimated production volume is referred to as the "production run length."
Indirect Labor
Indirect labor denotes the time needed for supervising or managing those involved in product creation. It also includes the time necessary for handling or overseeing other aspects of production. The tracking of work progress is another element of indirect labor.
Materials
Raw materials are the essential components used in the manufacturing of a product. The cost of materials fluctuates based on the type and quality of materials employed, as well as their availability. Material costs can also be influenced by shifts in market prices. Examples of material costs include the prices of materials like steel, plastic, and wood, which can be subject to variations in response to supply and demand fluctuations.
Depreciation
Depreciation is an accounting method used to allocate the cost of a fixed asset over its useful life. In accounting, depreciation serves bookkeeping purposes and does not represent an actual cash outflow. When a business records the acquisition of a fixed asset, such as machinery, it deducts a portion to account for the anticipated decline in the asset's value over time. This amount, known as depreciation expense, is recorded annually to reflect the diminishing value of the asset due to wear and tear. As the asset loses value, a business owner can anticipate selling it at a lower price than the original purchase cost.
In summary, variable costs are those that respond to changes in production levels and include expenses like materials, direct and indirect labor, and other costs dependent on output quantities. Fixed costs, conversely, remain constant regardless of production levels and encompass expenses such as rent, interest, and insurance. Material costs and employee wages are typical examples of variable costs, while fixed costs remain impervious to changes in production volume.
0 Comments