Role of Variable Costs in Accounting and Financial Management

A business incurs costs on different items, services, and transactions for smooth running. The bookkeeping services Los Angeles records these expenses in correct accounts to enable tracking and controlling. A firm needs to have different cost accounts for purchases, salaries, administrative overheads, rent, utilities, maintenance, etc. While some of these costs occur on resources that can generate economic benefits, others are purely current. Businesses can categorize expenses on different bases and implement control practices to minimize them. Optimal monitoring and supervision of expenditures enable enhanced profitability.  

 

Based on the time, a business incurs fixed and variable costs. The fixed costs refer to expenses incurred on permanent staff, rent, and other elements that do not change with the production level. On the other hand, variable costs vary with the production level in a short time. This categorization occurs only in the short term because all expenses are variable in the long term. The fixed costs can also vary when firms have enough time to monitor and alter them.   

 

Variable costs play a significant role in a firm's functioning and financial management. Because it changes with the production levels, businesses have to pay keen attention to it. When firms exceed their budget, variable costs come to their rescue in the short term. Let us understand its concept in detail: 

 

What are variable expenses? 

 

Variable expenses change with the proportion of production or sale by a company. It has direct connections with the production volume- if the level increases, the costs also rise, and vice-versa. Examples of variable expenses recorded by bookkeeping services Los Angeles include: 

 

• Raw material or supplies 

• Labour 

• Packaging 

• Shipping expenses, etc 

 

Businesses can calculate variable costs with the following formula: 

 

Total Variable costs= Quantity produced * Variable rate per unit produced  

 

Firms can take assistance from outsourcing accounting services in using variable costs to their advantage. Variable costs influence the decision-making of a firm. It allows them to manage the production level without exceeding the budget. A firm can enhance profitability in the short run by minimizing variable costs. Similarly, achieving economies of scale can help decrease variable expenses in the long run. Another role of variable costs in a firm's functioning relates to break-even analysis. A company achieves a break-even point when the sales equal the total costs. Since fixed costs don't change, companies rely on variable expenses and optimize them.