Search
Close this search box.

Essential Tips for Managing Variable and Fixed Costs

Every time you onboard a new subcontractor, confirm the status of their workers’ comp policy. You should also periodically check in with existing subcontractors to see if the status of their workers’ comp policy has changed. Unless your business is located in Washington, Wyoming, North Dakota or Ohio, you have the option to switch to pay-as-you-go workers’ comp. While staff salaries are fixed, there are ways to lower the cost of employee salaries.

  • Variable costs, on the other hand, may be adjusted in the short-term to accommodate changes in output levels.
  • Variable costs are usually viewed as short-term costs that can be adjusted.
  • If a new technology can reduce fuel consumption, investing in this could represent considerable savings, even when the cost of the new technology is taken into account.
  • The higher the risk of injury, the higher the worker’s compensation premium will be.
  • In the realm of scaling operations, the behavior of variable costs is crucial.

Variable costs change every day, and thus every month and every year. The strong protections prevent rogue employees from being able to cause chaos, and minimize wildly oscillating payables balances. Google, the giant of search engine advertising, has some protections in place for CPC campaigns, helping businesses to not burn through their budgets all at once.

What is a variable cost?

One of the challenges business owners face is accurately accounting for variable costs. Accounting for variable costs is easiest when using accounting software, as many of the costs involved are automatically recorded when purchase orders are processed or materials received. If a business identifies a significant variable cost that can be reduced with a specific technology, it might be financially advantageous to invest. However, this decision must be made carefully, balancing the cost of the investment against the potential savings in variable costs. For example, let’s say that Company ABC has a lease of $10,000 a month on its production facility and produces 1,000 mugs per month. If it produces 10,000 mugs a month, the fixed cost of the lease goes down to the tune of $1 per mug.

Maybe one of your products could be designed with fewer parts or features. On top of that, inefficient internal processes like production design can also add to variable costs. Cost of goods sold, repairs and maintenance, taxes, travel expenses, and office supplies are just a few examples of the many types of variable business costs. Spending on variable costs is volatile and unpredictable in nature, making it difficult to manage. All board members should be involved in the budgeting process of their building. However, board members come from a wide array of professional backgrounds, and often lack experience managing large budgets and do not know how to effectively cut costs.

Basics of Variable Costs for Businesses

At the end of the year, go back and compare what your estimates to what you ended up spending. There are some costs that fall between fixed and variable costs, which are categorized into semi-variable costs (also known as semi-fixed coss or mixed costs). For this reason, variable costs are a required item for companies trying to determine their break-even point. In addition, variable costs are necessary to determine sale targets for a specific profit target. The cost to package or ship a product will only occur if certain activity is performed.

Everything You Need to Know About Variable Costs

For instance, an office worker at a construction company who only handles administrative work may be assigned a different code than the construction company at large. If independent contractors aren’t self-insured, they will also need to be classified accurately. CooperatorNews.com is an online edition of CooperatorNews New York newspaper. The publication serves the co-op and condo community with thousands of free articles on management, finance, maintenance and more… Boards should also educate shareholders about tax rebates that they may be eligible for but not aware of, such as veterans’ benefits. Boards can provide an important service to shareholders by simply putting articles in the monthly newsletter about ways to reduce their real estate taxes.

Different Types of Variable Costs

These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. Other times, however, a business will have more options when variable costs emerge, as they change for factors more within a company’s control. These factors can include the mood the issuance of common stock of suppliers, price runs on premium (but substitutable) raw materials, and changes in insurance rates. Most business failures have to do with cash flow issues, and mismanaging variable costs can put your company at high risk. Controlling and actively seeking out opportunities to reduce variable costs is essential to ensure profitability, continuity, and long-term success.

Reworking your budgeting process can help you prepare for the unknown. Incorporating new strategies can make your business more agile in response to volatility in variable expenses. It also provides protection and care for employees who are injured on the job and replaces lost wages. Having good workers’ comp insurance gives both employers and employees peace of mind. To learn more, check out our guide that explains how workers’ compensation insurance works. However, it is crucial that if the staff size is reduced, all union rules and regulations are followed carefully.

By tracking variable costs, a company can create a growth plan, adjusting production volume and resources accordingly for optimal financial results. While variable costs generally increase with higher levels of production, the rate at which they increase can depend on efficiency and scale. For instance, as a company produces more, it may be able to negotiate better prices for raw materials, thereby lowering the unit variable cost. Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs.

For the examples of these variable costs below, consider the manufacturing and distribution processes for a major athletic apparel producer. To calculate the variable cost of each item you sell, add up every expense directly related to creating it—the variable cost per unit. Virtual or ghost cards often come with electronic dashboards that provide acute tracking and spend management insights. These types of cards also have built-in controls to help combat variable spending at the source. Sometimes when variable costs are spinning out of control, it’s because a less than honorable supplier has decided to extract every dollar they think they’re entitled to. Accordingly, businesses will want to do anything they can to help minimize their exposure to potential cash flow issues.

What are variable expenses?

For manufacturing companies, each of these is essential for a successful business. But again, at the root is understanding and accurately calculating variable costs. Knowing the variable costs helps allocate resources based on potential returns and profits. Common fixed costs included in the COGS calculation are salaries for supervisory employees required to ensure product quality and equipment depreciation costs.