Useful Tips

Variable costs: types, calculation formula


Variable costs are those costs that in the manufacturing process of a product (or other production process) change in parallel with the dynamics of its output. However, variables can be called not only production, but also costs not related to the production process. An example of the latter are storage, packaging, transportation costs.

We can conditionally say that variable costs characterize the value of the goods produced, while constant costs characterize the price of the company.

What relates to variable costs

Variable costs include costs for:

  • procurement of raw materials
  • for components and spare parts for industrial equipment,
  • related to the sale of finished products (for transportation, storage, etc.),
  • for the main piecework salary for workers,
  • on electricity and fuel that are consumed in production.

Examples of direct variable costs

Direct variable costs include:

  • implementation costs, including commission to sales agents,
  • components, materials,
  • energy costs for the production cycle,
  • transportation costs
  • technological costs.

Total variable costs

The total variable costs include expenses that change in parallel with the change in production volumes within the potential capacity of production capacities.

The total variable costs directly depend on the indicator of the company's business activity and represent the total variable costs aimed at the production of a certain amount of products of one type or a given volume of finished products of different assortments.

Conditionally variable costs

To conditionally variable costs should include costs that are directly related to the volume of production and marketing of marketable products. Throughout the entire production and economic activity of the company, they vary in quantity, structure and quality.

Conditionally variable costs can also change due to a change in business activity, although unlike variable costs, this does not happen so explicitly.

An example of such costs is the payment of piecework wages to workers or interest to sales managers.

General characteristics

Variable Costs (VC) are the costs of the organization, which change their quantity according to the volume of production. If the company ceases to function, then this figure will be zero.

The composition of variable costs includes such types of costs as raw materials, fuel, energy resources for production. This also includes the salary of key employees (part that depends on the implementation of the plan) and sales managers (percentage for implementation).

This also includes tax fees, which have as their basis for calculating the size of products sold. These are VAT, stocks, tax on the simplified tax system, the single social tax, etc.

By calculating the variable costs of the enterprise, you can increase the profitability of the company subject to the competent optimization of all factors influencing them.

Effect of sales volume

There are different types of variable costs. They differ in determining signs and form certain groups. One of these classification principles is the breakdown of variable costs by sensitivity to the impact of sales volumes on them. They are of the following types:

  1. Proportional costs. Their response rate to changes in production volume (elasticity) is 1. That is, they grow in the same way as sales.
  2. Progressive costs. Their elasticity is greater than 1. They increase faster than the volume of production. This is a high sensitivity to changing conditions.
  3. Agressive costs respond to changes in sales volumes more slowly. Their sensitivity to such changes is less than 1.

It is necessary to take into account the degree of response of changes in costs to an increase or decrease in product output when conducting an adequate analysis.

Other varieties

There are several more signs of classifying this type of cost. On a statistical basis, the variable costs of the organization are general and average. The former include all variable costs for the full range of products, and the latter are determined per unit of output or a specific group of products.

Based on the attribute to the cost price, variable costs can be direct or indirect. In the first case, the costs directly relate to the price of sales. The second type of cost is difficult to assess for attributing them to cost. For example, in the process of producing skim milk and cream, finding the cost for each of these items is quite problematic.

Variable costs can be production or non-production. The first includes the costs of raw materials, fuel, materials, salaries and energy resources. To non-productive variable costs should include management, business expenses.

To make the calculation of variable costs, a number of formulas are used. Their detailed study will help to understand the essence of the category in question. There are several approaches to the analysis of the indicator. Variable costs, the formula of which is most often used in production, look like this:

ПЗ = Materials + Raw materials + Fuel + Electricity + Salary bonus + Percentage for sales to sales representatives.

There is another approach to assessing the presented indicator. It looks like this:

PZ = Gross (margin) profit - fixed costs.

This formula emerges from the assertion that the total costs of the enterprise are found by summing fixed and variable costs. Using one of two approaches, you can assess the state of the indicator in the enterprise. However, in order to evaluate the factors affecting the variable part of costs, it is better to use the first type of calculation.

Break even

Variable costs, the formula of which was presented above, play an important role in determining the break-even point of the organization.

At a certain point of equilibrium, the company produces a volume of production at which the magnitude of profit and costs. At the same time, the company's net profit is 0. The marginal profit at this level corresponds to the sum of fixed costs. This is the breakeven point.

It shows the minimum acceptable level of income at which the company will be profitable. Based on such a study, the analytical service should determine the safe area in which the minimum acceptable level of sales will be carried out. The higher the figures from the breakeven point, the greater the indicator of the stability of the organization and its investment rating.

How to apply calculations

When calculating variable costs, you should take into account the determination of the breakeven point. This is due to a certain pattern. As variable costs increase, the breakeven point shifts. The profitability zone at the same time moves even higher on the schedule. With an increase in production costs, the company should produce a larger volume of products. And the cost of this product will also be higher.

In ideal calculations, linear relationships are used. But when conducting research in real production conditions, a nonlinear dependence can be observed.

For the model to work accurately, it must be applied in short-term planning and for sustainable categories of goods that are not dependent on demand.

Cost Reduction Ways

To reduce variable costs, several ways to influence the situation can be considered. It is possible to take advantage of the effect of increasing production. With a significant increase in production, the change in variable costs becomes non-linear. At a certain point, their growth slows down. This is the point of refraction.

This happens for several reasons. Initially, management costs are reduced. With such events, it is possible to conduct research and introduce technological innovations into the production process. Defective size is reduced, product quality is improved. A more complete capacity utilization also has a positive effect on the indicator.

Having become familiar with such a concept as variable costs, you can correctly use the methodology for their calculation in determining the ways of enterprise development.

What are the costs of the enterprise

The costs (costs) arising from a legal entity for management accounting are divided into 2 large groups:

  • Permanent, which ensure the work of the entire enterprise as a whole, but are not directly related to the process of main production. They do not depend on the volume of production and take place even if the production is temporarily not functioning. These include, for example, the costs of maintaining the management apparatus, taxes, rent, sales organization, advertising, information and consulting services, communication services, training.
  • Variables that make up the actual cost of production (direct costs of production). Their volume directly depends on the volume of production and changes with it.

The attribution of costs to fixed or variable costs of the enterprise is rather arbitrary. They are determined by many factors and in reality reveal more complex dependencies, including on production volumes.

The determination of their sizes, and therefore the reliability of economic calculations and the reliability of the conclusions that are made on their basis, depend on the correctness of the separation of costs into these 2 groups.

The variable costs of the company are ...

Variable costs include expenses on the production process itself, changing in relation to its scale. Their total amount grows (or decreases) together with the volume of production, which depends on the quantity of output, due to both the total number of direct costs and the cost of certain types of expenses. That is why in reality the relationship of variable costs with the volume of production is rarely directly proportional. They can be both faster (progressive costs) and slower (regressive costs) growth.

Comparative constancy is distinguished by variable costs per unit of production, due to the fact that their quantitative volume is determined by calculation. But they are also dependent on the cost of certain types of expenses included in the calculation, and the total production volumes, with the growth of which they may decrease.

What costs relate to the variable costs of the enterprise

The attribution of costs to variables is largely determined by the characteristics of the main activities of the enterprise. Examples of variable costs include:

  • for a manufacturing enterprise - the cost of raw materials, electricity, the salary of the main production personnel, accruals on this salary, depreciation of equipment, auxiliary materials,
  • for a trading company - the cost of purchased goods, packaging costs, percent of sales paid to sellers or managers, with charges on them, remuneration to intermediaries,
  • for a construction company - the cost of materials, electricity, the salary of construction workers with charges on it, depreciation of equipment, services of subcontractors,
  • for a trucking company - fuel costs, drivers' salaries with accruals on it, travel on toll roads, car depreciation, services of third-party organizations for loading and unloading.

The source of cost data is primarily accounting data. Provided that they are complete and reliable and the allocation to the accounts of accounting is carried out correctly.

In small organizations, the question of the division into fixed and variable costs is solved quite simply:

  • Enterprises that use accounts 20 and 26 to collect costs include the expenses collected on account 26 as constant, and the variables on account 20 as variables.
  • Enterprises that use account 44 (trading) will have to divide the costs collected on it into fixed and variable (referring to them the costs of packaging goods, interest and fees paid for the sale, with charges on them). To the amount allocated to the account 44 variable costs will be added the cost of goods sold (account 41).

The situation is more complicated in large organizations that use all the accounts intended for this purpose to collect costs (20, 23, 25, 26, 44). They are faced with the question of attributing to fixed or variable costs the costs collected on accounts 23 and 25. The decision on them is made by the enterprise itself, depending on the specific production conditions existing at that enterprise.

For example, the estimate of the costs collected on account 23 (auxiliary production) depends on their purpose. The following examples of the occurrence of variable costs are possible:

  • Account 23 is intended only to meet the needs of the main production. In this case, it will be completely closed monthly on account 25, and its allocation to certain costs is a question of how the costs accumulated on account 25 are estimated for these purposes.
  • Ancillary production meets the needs of the entire enterprise, which is the case most often. That is, account 23 at closing is distributed between accounts 25 and 26. Then, part of the costs collected on account 23 will definitely fall into fixed costs (together with the costs collected directly on account 26), and the allocation of the remaining part will depend on How are the costs recorded in the account 25.
  • A part of the auxiliary production is sold to the side, and the rest either provides only the main production, or the needs of the entire enterprise. In this case, the costs on account 23 related to products sold on the side will be regarded as variable costs, and the rest of them will depend on which account (or accounts) they will be transferred to when account 23 is closed monthly.

The costs collected on account 25 can be attributed to both fixed and variable costs. On the one hand, these costs are not directly related to the products being created. Being workshop, they are distributed and can be regarded as permanent. On the other hand, it is impossible to create products without them, and the workshop functions precisely because these products are created in it.

In addition, different types of products can be produced on the same equipment, the depreciation of which will be charged in this case to account 25. A similar situation arises with regard to accounting for electricity and water used for production needs, as well as a number of other expenses. That is, most often justified is the inclusion of costs collected on account 25 in the composition of variable costs. For working with them, this option is also more convenient because the finished products, which are accounted for before sale on account 43, get there at the production cost (i.e., including part of the distributed shop expenses in it).

Calculation of variable production costs

How to calculate variable costs? Very simple.To find their total amount for the period, you need to add up all the costs that are defined as variables.

It is convenient to use for this the accounting credentials for the accounting accounts discussed above. It should be borne in mind that in accounting there is no division into fixed and variable costs, but the existing direct costing method allows them to be divided in this way, according to which fixed costs can be written off to reduce the financial result at a time. These are the costs accounted for on accounts 26 and 44. If all other costs are considered variable (and this is reasonably justified for account 25), then the calculation of variable costs is significantly simplified.

In the cost-sharing situations we have discussed above in small and large organizations, this will look like this:

  • Small enterprises that use only two accounts (20 and 26) to collect costs will take into account as variables the amount of expenses that will be debited from account 20 (if the company provides services) to debit of account 90 or from account 20 to debit of an account 43 (when it comes to finished products). In the first case, for the period corresponding to the reporting, this amount can be taken from line 2120 of the report on financial results. In the second, variable costs will fall into the same line of form 2 if the volumes of produced and sold over the period of production coincide.

Read the article about the procedure for entering data in the lines of the report on financial results.“Filling out form 2 of the balance sheet (sample)”

  • Trade organizations that use only one account 44 to account for costs will distinguish among them those that are defined as variables (packaging costs, interest and fees paid for the sale, charged on them), and adding up their amount with the cost of the goods sold (which will be equal to the amount debited from account 41 to the debit of account 90), they will receive the total amount of variable costs for the period in question. It will not work to take this data directly from accounting.
  • Large organizations that use all existing accounts (20, 23, 25, 26, 44) for cost accounting and decide to classify the costs collected on account 25 as variable, the variable costs for the period will be defined as the cost of finished products debited from account 20 to the debit of account 43, or as the cost of services debited from account 20 to the debit of account 90. If the organization does not carry out trading activities and it does not need to share the costs collected on account 44, then for the reporting period the amount of variable costs of services can also be at son-in-law from line 2120 of the financial results report. Data on finished products will fall into this line when the volumes of manufactured and sold products coincide for the period under review.

Thus, the use of the direct costing method greatly simplifies the calculation of the amount of variable costs. If this method is not applied, then the variable cost formula will look like this:

where: PI - variable costs,

H - costs incurred in connection with the direct creation of the sold goods (works, services) and taken into account in their cost. They must be summarized, but at the same time, expenses that fell into the cost of distribution of the account 26 should be excluded from them.

General, average (unit) costs

The total costs for the period, consisting of fixed and variable, are called total costs. Accordingly, the total costs of each of the groups forming this amount are called the total fixed and total variable costs.

For each of these amounts, it is possible to determine the average (or unit) costs, which are calculated as the quotient of dividing the total amount of the corresponding costs by the number of products produced for the period under consideration. Average (or unit) costs are costs per unit of output.

You can calculate similar indicators by type of product. This will make it possible to establish an appropriate price for it, and if it turns out to be significantly higher than the market price, then decide on the termination of production or ways to reduce costs (production or management).

How average variable costs are calculated

To calculate the average variable costs (SRPZ) the formula is used:

where: PrZ - variable costs,

Q - the amount of finished products in physical units.

Read about how finished products are reflected in the balance sheet in our article “How is finished products reflected in the balance sheet?”.

Variable Cost Examples

According to international financial reporting standards, variable costs in production are divided into indirect and direct. Indirect production costs include expenses that demonstrate a direct dependence on changes in the volume of economic activity, but due to a number of technological production nuances, they cannot be directly attributed to the products manufactured by the enterprise. At the same time, direct variable costs in full, based on the data of primary accounting, can be directly attributed to the cost of production.

Read more about the division of costs into groups in our article “How to divide income tax expenses into direct and indirect?”.

Examples of direct variable costs are costs:

  • on the remuneration of workers involved in the production process, including accruals on their salaries,
  • basic materials, raw materials and components,
  • electricity and fuel used in the operation of production mechanisms.

Examples of indirect variable costs:

  • raw materials used in complex production,
  • expenses for scientific development, transportation, travel expenses, etc.

We also advise you to familiarize yourself with the procedure for dividing costs into indirect and direct for tax purposes. Read more about this in the article “How to divide income tax expenses into direct and indirect?”.

Due to the fact that variable costs vary in direct proportion to the production volume, and the same costs per unit of finished goods usually remain unchanged, when analyzing this type of cost, the value per unit of output is initially taken into account. In connection with this property, variable costs are the basis for solving many production tasks associated with planning.


In general, specialists share the costs of fixed and variablee. Fixed costs do not depend on the level of output. They include the rental of premises, the cost of retraining personnel, payment of utilities, etc.

It should be noted that this division is very arbitrary. For example, conditionally variable costs are also distinguished. Their value depends on the business activity of the company, however, this dependence is not direct. These include, for example, long-distance calls as part of the subscription fee for telephone services.

Usually variable spending can be attributed to direct. This means that, firstly, they are directly related to the production of a product or service, and secondly, they can be included in the cost of goods based on the primary documentation without any additional calculations.

You can learn more about these indicators from the following video:


Without delving into the essence of the problem, we can solve the fact that the growth of such costs increases with the growth of production volume, with an increase in sales of products, etc. However, this is not entirely true. Depending on the nature of the volume of output among the variable costs distinguish:

  • proportionalthat increase with an increase in the volume of production (if the production of goods increases by 20%, then expenditures proportionally increase by 20%),
  • regression variableswhose growth rates are slightly behind the growth rate of production (if production increases by 20%, spending can increase by only 15%),
  • progressive variablesthat increase somewhat faster than the production and marketing of goods (if production increases by 20%, spending increases by 25%).

Thus, we see that the variable costs are not always directly proportional to the volume of production. For example, if in the event of expansion of the enterprise and increase in the volume of output, a night shift will be introduced, then payment for it will be higher.

Direct and indirect costs among the variables are distinguished quite conditionally:

  • Usually to direct include costs that may be associated with the production of a particular product. They relate directly to the cost of goods. This may be spending on raw materials, fuel or wages for workers.
  • To indirect can be attributed general shop, factory expenses, that is, those associated with the manufacture of a group of goods. Due to factors such as technological specificity or economic feasibility, they can not be attributed directly to the cost. The most common example is the purchase of raw materials in complex industries.

In the statistical documentation, expenses are divided into general and average. This division makes sense in the reporting documents of enterprises:

  • Medium calculated by dividing the variable costs by the volume of goods produced.
  • Are common - this is the sum of the fixed and variable costs of the organization.

You can also talk about production and non-production types. This division is directly related to the manufacturing process:

  • Production are part of the cost of goods. They are material and amenable to inventory.
  • Non-production but they no longer depend on production volumes, but on duration. Therefore, it is impossible to inventory them.

Thus, we can distinguish the most common examples of variable costs in production:

  • the wages of employees, depending on the volume of goods produced by them,
  • the cost of raw materials and other materials necessary for the manufacture of products,
  • expenses for warehousing, transportation and storage of goods,
  • interest paid to sales managers,
  • taxes related to production volumes: VAT, excise taxes, etc.,
  • services of other organizations related to the maintenance of production,
  • the cost of energy resources in enterprises.

If you are interested in how to calculate the net profit of an enterprise, read this article.

Read about how to correctly calculate the profitability of an enterprise here.

Use of variable costs of the enterprise in financial accounts

Variable costs are involved in the calculation of such important economic indicators as:

  • break-even point parameters, in the formula of which there is both the total amount of variable costs for the period (for calculation in monetary terms) and average variable costs per unit of output (for calculation in quantitative terms),
  • margin of financial strength, for the calculation of which you need the value of sales determined for the breakeven point,
  • critical (minimum possible) amount of variable costs per unit of production,
  • value of production leverage (leverage),
  • profitability of certain types of products.

Calculation of costs per unit of production allows us to derive calculation formulas, on the basis of which it becomes possible to forecast costs for any volume of production.

For other coefficients calculated in order to conduct an economic analysis, read the article"The main financial ratios and formulas for their calculation"

Variable costs - an indicator of particular importance for its application in economic calculations. That is why the accuracy of determining their volume is especially important.

How to count them?

For convenience, variable costs can be schematically expressed as follows:

  • Variable spending = Raw materials + Materials + Fuel + Percentage of wages, etc.

For the convenience of calculating the dependence of costs on output, the German economist Mellerovich introduced cost response coefficient (K). A formula showing the relationship between cost changes and productivity gains looks like this:

K = Y / Xwhere:

  • K is the cost response factor,
  • Y - the growth rate of costs (in percent),
  • X - the growth rate of production (trade, business activity), also calculated in percent.

Using this formula, you can calculate the type of variable costs depending on the nature of the volume of output. At proportional costs, the response coefficient will be 1. For example:

  • 110% / 110% = 1

The response rate of progressive spending will be more than one:

Therefore, the coefficient of regressive spending is less than 1, but more than 0:

The costs of any unit of production can be expressed by the following formula:

Y = A + bXwhere:

  • Y stands for total costs (in any currency, for example, rubles),
  • A - the constant part (i.e. the one that does not depend on the volume of production),
  • b - variable costs, which are calculated per unit of product (coefficient of response costs),
  • X - an indicator of business activity of the enterprise, presented in physical units.

Average variable costs can be calculated using the following simple formula:

AVC = VC / Qwhere:

  • AVC - average variable costs,
  • VC - variable costs,
  • Q - the volume of products.

On the graph, the average variable costs are presented, as a rule, in the form of an increasing curve line.