The definition of variable costs is basically a general term in companies when carrying out a production process for an item or project. Apart from variable costs or also known as variable costs, there are other types that are also commonly used in bookkeeping company operations, namely fixed costs.
In general, variable costs and fixed costs are included in the types of production costs of an operating company. So, this article will discuss in more depth the meaning of variable costs, their characteristics, types, examples and differences with fixed costs. Come on, see in full below!
A. Definition of Variable Costs
Reporting from the online site of the Financial Services Authority or abbreviated as OJK, the definition of variable costs can be interpreted as a company’s costs which have an amount according to the volume of its business activities. The term variable costs is also usually referred to as the opposite of fixed costs, so it is also known as variable costs.
Variable costs themselves are costs with an amount that is not fixed or changes according to the intensity of use of the cost source. This can be understood as costs whose magnitude depends on the output or output.
Meanwhile, as a cost that changes according to the company’s business activities, variable costs can also be said to be costs whose amounts increase and decrease depending on the company’s operational volume.
These variable costs can actually be calculated as the sum of the marginal costs of all units produced. In other words, variable costs themselves are costs that are directly related to the production of an item. Variable costs are also sometimes referred to as unit-level costs or level-level costs. This is because these variable costs have many variations with the number of units produced.
Therefore, variable costs are costs that will only be needed during the production process. This may form the basis for the expenditure per unit that will be reported. One type of variable cost that is needed during the production process is often known as purchasing raw materials.
Expenditures for purchasing your own raw materials will be greatly influenced by the output target of the company’s entire production process. Therefore, variable costs will always change during the production process. This also applies when the production process stops, the variable costs incurred by the manufacturing company will become zero.
B. Characteristics of Variable Costs
After understanding the meaning of variable costs, here are some characteristics of variable costs that you need to know. Variable costs basically have special characteristics that have been explained in Cost Accounting. Some characteristics of variable costs include:
1. Change in total quantity in the same proportion as change in volume.
2. Cost per unit is relatively constant even though volume changes within the relevant range.
3. Can be charged to the operations department quite easily and precisely.
4. Can be controlled by someone in a certain department.
C. Types and Examples of Variable Costs
After understanding the meaning of variable costs as well as their characteristics and types, below we will present several examples of variable costs. Examples of variable costs are raw material costs, direct labor wages, product distribution costs, sales commissions, and overhead costs. Some examples of variable costs that you need to know include:
1. Raw Material Costs
The first example of variable costs is the cost of raw materials for production. The raw material costs themselves include the intrinsic value of the goods to the packaging. As the name suggests, raw material costs must basically be incurred according to the amount of production desired by a company in a certain period.
2. Direct Labor Wages
The second example of variable costs is direct labor wages. Direct labor wages can be understood as wages paid to workers and are directly related to the production process. It is known that direct labor wages are different from salaries. This is because wages are paid per unit of product, not monthly.
3. Product Distribution Costs
The third example of variable costs is product distribution costs or can also be interpreted as expenses to deliver products to distributors to end-users. Product distribution costs include petrol costs, couriers or drivers, and so on. This kind of product distribution costs are usually referred to as variable costs because they have an amount that corresponds to the quantity of the product distributed.
4. Sales Commission
The fourth example of variable costs is sales commissions. Sales commissions themselves are needed so that sales can reach or even exceed targets. Some companies are known to apply commissions or bonuses to their sales. This is because the number of products really depends on how many sales the marketing division has succeeded in selling. Therefore, sales commissions can be said to be variable costs because they are related to the costs of selling the company’s products.
5. Overhead Costs
The last example of variable costs is overhead costs. This type of cost can be interpreted as several costs other than those previously mentioned and cannot be included in detail in the financial statements. It can also be said that this cost is not very important so stakeholders do not need to know about it. Some examples of overhead costs are usually the costs of buying stationery, printing documents, daily consumption, buying air freshener, and so on.
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F. Types of Variable Costs Based on Goals and Planning
When viewed based on the objectives and planning of variable costs, variable costs can be divided into two types, namely engineered variable costs and discretionary variable costs. The following is an explanation regarding these two types of variables, including:
1. Engineered Variable Cost
According to Management Accounting, engineered variable costs are costs that have a certain physical relationship with the size of certain activities or costs that have a close and real relationship between input and output. For example, raw material costs.
Based on the Cost Accounting book, almost all variable costs are basically engineered variable costs. If input from costs changes, then output can also change in proportion to the change in input. This also applies in reverse.
2. Discretionary Variable Cost
Discretionary variable cost is a cost whose total amount is proportional to changes in the volume of activities as a result of policies or decisions from management. One example of discretionary variable costs is advertising costs set by management.
Similar to Management Accounting, discretionary variable costs are known to have a graphic pattern of variability, but not due to the same reasons, for example direct materials or direct labor. These increased costs themselves may be more related to management authority in spending activities.
However, if the output changes, the input will also change in proportion to the change in output. However, in discretionary variable costs, if the input changes, the output does not necessarily change. This means that this type of variable cost can be said to be a variable cost whose behavior is not pure or real. Where it can change levels and large volumes are required.
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E. How to Calculate the Variable Cost Formula
In this section, we will start discussing how to calculate expenses or variable costs. The following is a variable cost formula that is important to pay attention to, namely:
Variable Cost (VC) = (Total Cost (TC) – Fixed Cost (FC)) / Quantity
Example of how to calculate variable costs based on the formula:
As of April 2022, Agus spent production costs of up to IDR 50 million, with >fixed cost bills reaching IDR 5 million. In that month, Agus is known to have succeeded in producing up to 2500 units of goods. So, the variable costs that need to be incurred are:
Variable Cost April 2021 Indi
= (Rp50,000,000 – Rp5,000,000) / 2,500
= Rp45,000,000 / 2,500
= Rp18,000
So, Agus’ variable costs in April 2022 will reach IDR 18 thousand per unit of product.
Read Also : What are Implicit Costs? Definition, Examples, Application and Calculations
F. Difference between Variable Costs and Fixed Costs
After discussing the meaning of fixed and variable costs, in this section we will discuss the differences between variable costs and fixed costs based on various aspects. The following is a review of the differences between the two types of costs, including:
1. In terms of when it occurs
The first point in the difference between variable costs and fixed costs can be seen in terms of when they occur. Variable costs are basically expenses with a shorter time span, be it once a week or even every day. Meanwhile, fixed costs are known as expenses that do not occur every day or based on a time span of one month, one year, even every few years.
2. In terms of nominal payment
The second point in the difference between variable costs and fixed costs can be seen based on the nominal payment. The nominal payment for fixed costs is usually much greater than for variable costs. However, even when the company is in a state of 0 profitability or profit, the nominal fixed costs will not change. This is of course different from the nominal variable cost payments which are much smaller and may be regulated by the company according to its financial conditions.
3. In terms of relationship with production
The next pound in the difference between variable costs and fixed costs is based on the relationship to production. Variable costs are basically variable costs that are very closely related to a company’s production process. Meanwhile, fixed costs are costs that do not have a direct relationship with the goods production process. Therefore, when there is a reduction in production, the nominal costs will be fixed and will not change.
4. In terms of accounting records
The next point in the difference between variable costs and fixed costs is in terms of accounting records. If you are used to reading financial reports, of course you will know that some companies make their own variable cost reports, especially for those operating in the manufacturing sector.
Therefore, variable cost reports will usually be issued every day, week, or even once a month depending on the flow of incoming and outgoing products. Meanwhile, fixed cost reports have an intensity that can be said to be very rare. Fixed cost reports can be issued every month, year, or every few years.
5. In terms of pricing
Then, the final difference between variable costs and fixed costs is based on the pricing aspect. Even though fixed costs have a very large amount, fixed costs are basically a cost component that is very rarely used, especially in terms of determining the price of a product.
The total amount of fixed costs is usually the basic benchmark for company costs when the company’s business activities are at level 0. This is of course very different from variable costs which are one of the strong bases for a company in determining prices for goods or products.
This is a discussion of the meaning of variable costs, from characteristics, types and examples, formulas to how to calculate them as well as the difference between variable costs and fixed costs. In this discussion, we can draw a conclusion that variable costs are expenses that the company will continue to pay whatever the conditions or it could be said to be costs that are dynamic and depend on production volume. Meanwhile, the nominal amount for fixed costs tends to be fixed or the same, not really depending on when sales increase or decrease.