What Is Variable Costing?

Variable cost (variable cost) refers to the costs paid to various factors of variable production, such as the cost of purchasing raw materials and electricity consumption and workers' wages. This cost varies with output and is often not paid until the actual production process begins. ^[1]

Variable costs

Variable cost and

According to the causes of variable costs, changes can be made into

1. Fixed costs, also called "fixed costs", are the symmetry of variable costs.

Fixed cost refers to the part of the cost that does not change with the product output or the amount of goods in circulation within a certain range.

1.Most fixed costs are

In business management, the ratio of variable costs to fixed costs is often referred to as operating leverage.

Operating leverage can be used as a measure of risk in the process of business management (especially production and decision-making). Try the following example for a brief analysis.

Now suppose there is an enterprise XYZ engaged in PC production. The company plans to establish a new PC production line with two AB solutions. Option A requires a fixed cost of 1,000 yuan while the variable cost of producing a PC is 10 yuan. Solution B requires a fixed cost of 500 yuan, while the variable cost of producing a PC is 20 yuan. (Do not consider discount analysis and feasibility analysis of project value)

It is easy to find that the operating leverage value of plan A is 0.01 and that of plan B is 0.04. We claim that plan B has higher operating leverage than plan A. In the case of the same fixed investment, higher operating leverage means higher operating risk. This conclusion also applies to the general situation.

It should be pointed out that operating leverage and cyclic effects are important factors affecting the beta of an enterprise. In the case that the beta cannot be directly obtained, a qualitative risk assessment can be performed on the object using operating leverage.