In our day-to-day life, both individuals and business have their basic needs. This includes fixed expenses such as phone or internet plans, subscriptions, rent, depreciation, and software fees, and variable expenses such as entertainment, raw materials for businesses, monthly groceries, gas, shipping, etc. All these expenses, for both individuals and businesses, are tracked on a daily, weekly, or monthly basis. Their fixed expenses do not need to be calculated every month, which helps to make budgeting easier, but variable expenses are not the same.
In this blog, we discuss what is a variable expenses, including the process of variable expense calculation, its benefits, and more in detail.
What is a Variable Expense?
Variable Expense is the cost of daily activities of both individuals and businesses. It did not generate a stable amount every month. The amounts of monthly variable expenses were totally dependent on the consumption or usage of utilities and basic needs. If we are talking about the variable expense of a business, then the raw material cost, packaging cost, raw material cost are included, and in the case of individuals, utility bills, health care costs, traveling cost like such things are included, which fluctuate every month.
How to Detect Variable Expenses?
To detect variable cost, there are many options available. Below, you can get the way to detect variable expenses in the financial statement.
Check the Income Statement
By reviewing the income statement from the financial statement, you can analyze the amount of money your business made and spent over a limited period of time. First, you need to check the changes in production cost, such as direct labor, raw materials, etc. If you get sales commissions based on your sales ratio, then that is also considered a variable cost or expense.
Analyze Expense Behavior
The expense behavior helps you to understand how prices change as the quantity of production changes. First, separate the total expense into two groups: fixed expenses and variable expenses. The fluctuating production expenses are added in the variable expenses group, where the fixed expense group contains the same and stable costs.
Use the Best Accounting Software or Tools
Using the best accounting software or tools, such as QuickBooks, Xero, Sage, etc., you can automate most of the accounting operations. This accounting software is connected with your account and daily tracks and records all the expenses. It makes the process easy to identify variable expenses by creating two separate groups and adding all the expenses in different groups.
Take Consultation From Your Accounting Team
By discussing with your accounting team, you can properly understand how the expenses or costs are categorized and the perfect ways to track your expenses. They also provide many valuable pieces of information on variable cost management, which helps you in daily expense management activities.
Ways to Calculate Variable Expense
You can calculate your variable expense manually by using these given steps.
- Starts with identifying variable costs.
- Then, determine the cost per unit using this given formula: (Variable cost per unit = total variable expenses/number of units).
- Now find the total production or sales quantity.
- Then, calculate the total variable cost using this given formula: (Total Variable Cost = Output of total quantity × Output of Variable Cost per Unit). The output of this calculation is your Variable expense.
Importance of Variable Expense for Business
Variable expense is important for a business because it directly impacts the business’s financial health and much more. Below, we are showing you the importance of variable expenses for your business.
- Profitability: variable expenses directly impact gross profit and net income, which helps a business decrease the risk in downturns and increase cash flow.
- Pricing Strategy: Through variable expenses, a business can plan for its growth and ensure its business profitability.
- Budgeting & Planning: The variable expenses are directly linked to sales or production. It helps a business to get an accurate profit report and make any financial decision.
- Break-Even Analysis: Variable expenses directly impact the contribution margin and verify the generation of profits.
- Financial Flexibility: Variable expenses directly scale with most of the business activities and help to eliminate cash flow crises during slow periods, and rapidly adapt to market changes.
Benefits of Variable Expense for Business
Variable Expenses provide many benefits to businesses, which help businesses to improve their financial health and their products and services. Below, we present a list of variable expense benefits for businesses.
- Motivate Salespeople: Variable Expense directly linking salespeople’s earnings as commissions or bonuses based on their quantity of sales or sales performance. This motivates them to sell more and earn more.
- Enhanced Operational Efficiency: Through variable expenses, a business can get the flexibility to scale sales with market demand, and this helps to enhance operational efficiency.
- Improved Cash Flow: A business also gets the flexibility to scale its sales, where it can drop its price during a sales drop and increase its price as the market demand increases. This helps a business to improve cash flow.
- Better Decision Making: Variable expenses help a business to make better decisions by getting an accurate profitability analysis, strategic scaling, and flexibility.
- Cost Control: Through variable expenses, a business can manage its expenses by quickly adapting to market changes and managing its production or sales.
Conclusion
Variable Expense is the fluctuating amount that depends on the consumption or usage of utilities and basic needs. In the case of businesses, it scales with the market changes, and those affect the businesses’ production and sales. In this article, we clearly describe what is a variable expense, with its importance and benefits in detail. We hope you all understand what is a variable expense and this article meets all your requirements.