Fixed and variable costs are two key concepts in any undertaking. Carrying a will allow us, in addition to the order in the accounts, a better forecast of our expenses.
Fixed costs
To start breaking down the concepts, you need to know what a fixed cost means and how to calculate it.
What are fixed costs?
The fixed costs of our enterprise are those costs that we must pay yes or yes. Fixed costs have the particularity of remaining stable over a period of time, regardless of how much we produce.
To summarize, they are costs that we will have to face without exception, whether on the day, the week, the month or the year.
Fixed cost formula
To calculate the fixed costs it is necessary to think about all the expenses that we will have to face in a period, for example, in the month.
A good practice is to itemize them in an Excel spreadsheet and then add them up to find out the total fixed cost. Then, if we divide the total fixed cost by the amount we have produced, we will obtain the unit fixed cost.
Suppose we have a pastry business and we sell cakes online. In this case, our fixed costs could be the WiFi service, telephone, taxes (), among others. That is, they are all those costs that do not depend on the number of cakes we make.
Fixed cost chart
As we mentioned before, the fixed cost remains constant, regardless of the units produced. Therefore, your graph will be a straight line similar to the one detailed below.
Variable costs
In our enterprise we will also find variable expenses that, precisely, will change according to the amount we produce. That is why it is very important to take them into account to obtain the value of the product that we are going to market.
What are variable costs?
Variable costs are those costs that can increase or decrease according to the level of production of our enterprise. That is, they are proportional to our activity.
So, as production increases, variable expenses will grow and, if productivity falls, costs will also decrease.
Variable Cost Formula
As with fixed costs, it is also important to know how to calculate variable cost.
To calculate the total variable cost, we must add all those costs that we have had in a period of time and that are related to our level of production.
If we want to calculate the unit variable cost, we must divide the total variable costs and the number of units produced. In this way, we will obtain the result of the variable cost per unit.
Continuing with the bakery example, as we produce more cakes, we are going to need more ingredients. All the inputs needed to produce more, be it sugar, flour or chocolate, increase variable costs.
Variable Cost Chart
Variable cost changes in proportion to the level of activity or total volume. Therefore, your graph has a positive slope that increases as the units produced increase.
Differences between fixed costs and variable costs
The main differences are that the fixed costs will not change if there is a higher or lower level of production in the enterprise. Variable costs, on the other hand, do depend exclusively on what is produced.
In addition, fixed costs will allow us to cover the needs and services that are essential for the operation of our company. Fixed costs will not change in the short term.
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Examples of fixed and variable costs
There are several examples that help explain what are the most common types of costs in companies and that we must take them into account for business growth. Although they will depend on each enterprise, we share some below.
Examples of Fixed Costs
- .
- Rental of the property.
- Municipal taxes.
- Services such as electricity, water, gas, internet, TV, technicians, etc.
- Administrative expenses.
Examples of Variable Costs
- Sales commissions.
- to send or buy a product.
- Purchase of materials for the production or offering of a service.
- Packaging.
total costs
Calculating the total costs (TC) of our enterprise is a very simple exercise. What we must do is add the total of the fixed costs (CF) with that of the variable costs (CV).
Thus, the formula is as follows:
CT = CF + CV
Fixed and Variable Costs: Frequently Asked Questions
What are the advantages of fixed cost?
The fixed cost helps us to define the price of the product and establish a goal about the profitability of the business.
What are the advantages of variable cost?
The variable cost facilitates the commercial strategy when analyzing the market sale price. This translates into a greater margin of maneuver for the sale. In addition, it will allow us to maximize the resources of the enterprise.
What are the methods for separating fixed and variable costs?
There are several methods, but the most commonly used are the high point and low point methods, the scatterplot method, and the least squares statistic.
conclusion
keeping track of the fixed and variable costs of the enterprisewe are going to have greater clarity about the finances and understand, for example, the volume of profit produced in the analyzed period.
This analysis will allow us to plan future actions assertively: what purchases can we make without compromising the financial health of the enterprise, what volume of stock to replenish or when to do it, evaluate the possibility of hiring more people or .
Written by for the Tiendanube Blog.
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