Definition of Variable Costs – The definition of variable costs is basically one of the general terms in companies when carrying out a production process of an item or project. Apart from variable costs, also known as variable costs, there are other types that are also commonly used in keeping company operational records, namely fixed costs.
In general, variable costs and fixed costs are included in the types of production costs of an operating company. Well, this article will discuss in more depth the meaning of variable costs, their characteristics, types, examples and differences from fixed costs. Come on, see more in the following!
A. Definition of Variable Costs
Reporting from the online site of the Financial Services Authority or abbreviated as OJK, the notion of variable costs can be interpreted as a company expense that has an amount in accordance with the volume of its business activities. The term variable costs is also commonly referred to as the opposite of fixed costs, so they are also known as variable costs.
Variable costs themselves are costs with an amount that is not fixed or changes according to the intensity of the use of sources of cost. This can be understood as a cost that has a magnitude depending on the output or outcome.
Meanwhile, as a cost that changes following the business activities of the company, variable costs can also be said to be costs whose amount increases and decreases depending on the company’s operational volume.
This variable cost can actually be calculated as the sum of the marginal costs or 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 the various variable costs have a lot of variation 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 to be reported. One type of variable cost that is required when carrying out the production process is often known as the purchase of raw materials.
Expenditures to purchase raw materials themselves will be greatly influenced by the output target of the entire production process of the company. Therefore, variable costs will always change during the production process. This also applies when the production process stops, the variable costs incurred by manufacturing companies will be 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 described in Cost Accounting. Some characteristics of variable costs include:
1. Change in total amount 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 assigned to the operations department fairly easily and precisely.
4. Can be controlled by someone to a particular department.
C. Types and Examples of Variable Costs
After knowing the meaning of variable costs as well as their characteristics and types, the following will present some examples of variable costs. Examples of self-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 variable cost example is the cost of production raw materials. The cost of this raw material itself includes intrinsic goods to packaging. As the name implies, raw material costs basically have to be spent in accordance with the amount of production desired by a company in a certain period.
2. Direct Labor Wages
The second example of a variable cost is direct labor wages. Direct labor wages themselves can be understood as wages paid to labor and are directly related to the production process. It is known that the wage of direct labor is different from the salary. 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 for delivering products to distributors to end-users. Product distribution costs include the cost of gasoline, courier or drivers, and so on. Product distribution costs of this kind are commonly referred to as variable costs because they have an amount that corresponds to the quantity of products distributed.
4. Sales Commission
The fourth example of a variable cost is sales commissions. The sales commission itself is needed so that sales can reach or even exceed the target. Some companies are known to impose commissions or bonuses on their sales. This is because the number of products is very dependent on how much 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. Costs of this type can be interpreted as costs other than those previously mentioned and cannot be included in detail in the financial statements. This cost can also be said to be not too important so that stakeholders do not need to know about it. Some examples of overhead costs are usually the cost of buying stationery, printing documents, daily consumption, buying air freshener, and so on.
F. Types of Variable Costs Based on Purpose 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 the 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 certain activity measures or costs that have a close and real relationship between input and output. For example the cost of raw materials.
Based on the Cost Accounting book, almost all variable costs are basically engineered variable costs. If the input of the cost changes, then the output can also change in proportion to the change in input. This also applies in reverse.
2. Discretionary Variable Costs
Discretionary variable cost is a cost whose overall amount is proportional to changes in the volume of activity as a result of management policies or decisions. One example of a discretionary variable cost is advertising costs set by management.
Similar to Management Accounting, discretionary variable costs are known to have graphical patterns of variability, but not for the same reason, for example, as direct materials or direct labor. This increased cost itself may be more related to management authority in spending activities.
It’s just that, if the output changes, then the input will also change which is proportional to the change in output. However, in this discretionary variable cost, if the input changes, the output may not necessarily change. This means, variable costs of this type can be said to be variable costs whose behavior is not pure or real. Where it can change in stages and large volumes are needed.
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 note, namely:
Variable Cost (VC) = (Total Cost (TC) – Fixed Cost (FC)) / Quantity
An example of how to calculate variable costs based on the formula:
As of April 2022, Agus incurred production costs of up to IDR 50 million, with bills > fixed costs 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 India
= (Rp. 50,000,000 – Rp. 5,000,000) / 2,500
= Rp. 45,000,000 / 2,500
= Rp. 18,000
So, Agus’ variable costs in April 2022 amounted to IDR 18,000 per product unit.
F. Differences 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 regarding the differences between the two types of fees, including:
1. In terms of when it happened
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, whether it’s once a week or even every day. Meanwhile, fixed costs are known as expenses that do not occur every day or are based on a span of one month, one year, even once in several years.
2. In terms of payment nominal
The second point in the difference between variable costs and fixed costs can be seen in terms of the nominal payment. The nominal payment of fixed costs is usually much larger when compared to variable costs. Even so, even when the company is in a condition of zero profitability or profit, the nominal fixed costs will not change. This is of course different from the nominal payment for variable costs which is much smaller and may be regulated by the company according to its financial condition.
3. In terms of Relations with Production
The next pound in the difference between variable costs and fixed costs is based on the relationship with production. Variable costs basically, variable costs have a very large relationship with the production process by a company. 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 remain the same 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 a financial report, of course you will know that several companies make separate variable cost reports, especially for matters that are engaged in manufacturing.
Therefore, variable cost reports will usually be issued every day, week, even once a month depending on the flow of entry and exit of a product. Meanwhile, the fixed cost report has an intensity that can be said to be very rare. Fixed expense reports can be issued every month, a year, or just once a few years.
5. In terms of pricing
Then, the difference between variable costs and the last fixed costs is based on pricing. Even though fixed costs have a very large amount, fixed costs are basically one of the cost components that are rarely used, especially in terms of determining the price of a product.
The total fixed costs are usually the basic benchmark of the company’s 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 of a company in determining prices for goods or products.
Thus the discussion about the meaning of variable costs, starting from the 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 will still be paid by the company regardless of the conditions or it can be said that costs are dynamic and depend on production volume. Meanwhile, the nominal amount for fixed costs tends to remain the same, not too dependent on when there is an increase or decrease in sales.