Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Variable Costs in Managerial Accounting Variable costs are costs that change according to the volume of production or sales of a product or service. That is, the greater the production or sales, the greater the required variable costs. Conversely, if production or sales decrease, variable costs will also decrease. Examples of variable costs are raw material costs, direct labor costs, sales commission costs, product shipping costs, and product packaging costs. The amount of variable costs will increase along with the increase in production or sales volume. In business, it is important to understand the difference between fixed costs and variable costs. Fixed costs must be paid regularly regardless of the level of production or sales, whereas variable costs are directly related to the level of production or sales. If a business wants to increase its profitability, then they can try to increase revenue or reduce variable costs for each unit of product or service produced. In some cases, a business may try to reduce variable costs by finding cheaper suppliers of raw materials or labor or looking for ways to increase production efficiency. This can be done using technology or optimizing the production process. In order to increase profitability, businesses must pay attention to both fixed costs and variable costs. They must find ways to optimize their operations by reducing unnecessary fixed costs and increasing production efficiency to reduce variable costs. In this way, the business can increase its profitability and achieve the desired financial goals. Apart from that, a business can also try to increase revenue by developing new products or expanding market share. This will help increase production or sales volume, and thus, increase variable costs. However, businesses must ensure that the increased variable costs do not outweigh the additional revenue generated. Businesses may also consider determining the selling price of their products or services by taking into account the variable costs associated with producing or selling. This can help a business to determine the right price which can generate a good profit. In a competitive business, optimizing variable costs can be a key factor in achieving a competitive advantage. Businesses may try to find ways to reduce their variable costs, such as leveraging technology or optimizing production processes. In this way, they can offer more competitive prices and increase their market share. However, businesses must still consider the quality of the products or services produced, because reducing variable costs should not sacrifice product or service quality. Businesses must ensure that they stay up to the quality standards required to remain competitive in the marketplace. In order to achieve sustainable business success, it is important for businesses to understand the difference between fixed and variable costs and consider ways to optimize both. By carefully considering fixed costs and variable costs, businesses can make smart financial decisions and successful business strategies. The following are examples of variable costs: 1. Raw material cost: Raw material cost is a variable cost because the more production that is produced, the more raw material is required. 2. Direct labor cost: Direct labor cost is a variable cost because the amount of work required to produce a product or service can change according to the volume of production or sales. 3. Sales commission fee: Sales commission fee is a variable cost because it is directly related to sales volume. The more products or services sold, the greater the sales commission fee. 4. Product shipping costs: Product shipping costs are variable costs because the amount of product shipped can change according to sales volume. 5. Cost of product packaging: Cost of product packaging is a variable cost as the number of packages needed will change according to the volume of production or sales. In all of the above examples, variable costs will increase as production or sales volume increases. Conversely, if production or sales decrease, variable costs will also decrease. Therefore, it is important for businesses to understand variable costs and how they can affect profits and profitability. It is important to note that variable costs do not always change in proportion to production or sales volume. In some cases, variable costs may increase gradually or show a tendency to decrease gradually. For example, the cost of raw materials may have volume discounts available if a business purchases larger quantities, thereby reducing the cost per unit for each item produced. Apart from that, businesses can also try to reduce their variable costs by using new technologies or optimizing production processes. For example, using more efficient machines or digital technology can help a business reduce variable costs in the long run. In addition, supply chain optimization can also help reduce variable costs by reducing delivery times and costs. The following are the characteristics of variable costs: 1. Changes with production or sales volume: Variable costs tend to increase as production or sales volume increases and decrease when production or sales volume decreases. 2. Unchanging per unit of product: Variable costs do not change per unit of product. In this case, the more products are produced or sold, the greater the variable costs. 3. Directly related to operational activities: Variable costs are directly related to operational business activities, such as production or sales, and depend on the amount of resources used for these activities. 4. Can be eliminated or reduced: Variable costs can be eliminated or reduced by reducing or avoiding certain operational activities. 5. Easier to calculate and predict: Variable costs are easier to calculate and predict than fixed costs because they are directly related to the volume of production or sales. 6. More flexibility: Variable costs are more flexible than fixed costs, which are difficult to change if the business experiences changes in production or sales volume. By understanding the characteristics of variable costs, businesses can take steps to reduce or manage their costs more effectively. For example, a business can reduce variable costs by optimizing production or increasing operational efficiency. A solid understanding of fixed and variable costs can help businesses make better decisions about their expenses and provide a clearer picture of how their financial decisions can affect their profitability. By considering both fixed and variable costs, businesses can estimate their costs and profits more accurately and make smarter decisions about their expenses.