Business

How to calculate variable costs

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You have to calculate variable costs as an important part of the income statement in the financial plan. In your sales forecast, you have previously determined the planned sales based on your calculated prices and the projected quantity sold. The next step is to determine variable costs. Variable costs are always considered to be all revenue-related costs – they are to be delimited from fixed or running costs, although the transition is quite fluid.

We will present how these variable costs are composed, which factors have an influencing effect and a concrete application example for the financial plan below.

What are variable costs?

Variable costs are part of the total monthly cost in the income statement in the business account. They depend on the amount of products manufactured or sold – so the amount depends, for example, on the prices for your raw materials, auxiliary materials etc. So these are costs that change from month to month in your company by different parameters. Variable costs arise directly from the production of products or your services.

Variable costs are therefore often referred to as direct revenue-related costs. From this they are composed:

  • Purchase prices for raw materials, auxiliary materials and consecrats
  • Purchase prices for goods
  • Transportation costs
  • Energy

In summary, these figures give the variable costs. Depending on production and sales, this data will fluctuate, so you should always take this into account when you calculate variable costs in your financial planning.

The opposite to variable costs is running costs. These are often referred to as fixed or operating costs. This includes expenses for rent or the salaries of your employees. They usually accrue relatively consistently every month and do not vary directly depending on the quantity produced. The current and variable coststogether make up the total cost of your business. In the income statement in the financial plan, you calculate both factors. This data is also relevant for later controlling.

Practical example: The variable cost of a restaurant

You are at the very beginning of your gastronomic career and want to determine what expenses you have to expect each month, so you need to calculate variable costs. In your revenue calculation for example, you first set the average consumption per guest and determined the monthly turnover. The question now is how large your use of goods is.

In the catering industry, the variable costs arise in particular from the prices for the purchase of beverages and food. Purchase prices vary according to supplier, volume discounts and season. Of course, they don’t just want to cover the cost of the dish served, but also want to profit from it. Therefore, it makes sense to create a detailed analysis of the purchase prices required for a dish even before your restaurant starts. You can enter these as purchases for the respective sales entry of your calculation, as shown in the following graphic from a financial plan.

This list with all variable costs allows you to detect too low profit margins and, if necessary, to change something to the planned selling price per dish or drink. You also provide information on whether you are competitive with your calculation per dish or drink. This means: Can your price for, for example, a meal prevail on the market?

Calculation of variable unit costs

In the next step, the variable unit costs provide information on whether your in sales planning the set sales price is realistic. This variable cost usage per item sold can be determined with a simple formula:

Total variable cost (K) : Production quantity or reference quantity (x) = variable unit cost (k)

In this particular case, this means, for example, for the sales of drinks in your restaurant:

  • Planned drinks sold: 1,800
  • Direct costs in purchasing: $700
  • other purchase of goods (included straws, beer lids, etc.): $250

Transferring to the formula means:

K (700 + 250 ) : x (1,800) = k ($0.52)

You must therefore expect variable unit costs of $0.52 per drink sold. You have already calculated a sales price of $2.50 per drink in your planning. This results in an expected turnover of $4,500 with drinks. Less the variable costs of a total of $950, if you sell 1,800 drinks, you will have a margin of $3,550. The calculation with the variable costs per drink is therefore initially based, the variable costs are covered. In the further financial planning, marketing costs, running costs such as rent and salaries, etc. will be taken into account. Step by step, the margin achieved will then decrease until you finally see if a profit or a loss arises.

Conclusion: Keeping all variable costs under control

Variable costs are an important part of the income statement in your financial planning. Variable costs in all industries depend on the amount of products or services you sell. This defines them as revenue-dependent costs in the cost estimate. They also flow directly into the price calculation for your products or services and indicate whether you are profitable.

In many areas, variable costs mainly include the purchase price of raw materials or goods. But transport and energy costs are also included as expenses – but also, for example, turnover-based commissions to sales representatives.

In direct contrast to this are current or fixed costs: for example, depreciation or rentfor your business or restaurant. These do not change directly if you sell more or less and are also included in your financial planning. The running costs will then be the next section you should read.