For example, the rent of a building is a fixed cost that a small business owner negotiates with the landlord based the square footage needed for its operations. It is important to note that fixed costs are not constant in the long run. Take the example above. The rent will be the same till the business occupies the space or till the landlord decides to increase the rent after the end of the lease agreement. If the owner decides to move to a bigger facility or pay more, the business expense would obviously go up.
Variable costs change directly with the output — when output is zero, the variable cost will be zero. The total variable cost to a business is calculated by multiplying the total quantity of output with the variable cost per unit of output. A common example of variable costs is operational expenses that may increase or decrease based on the business activity. A growing business may incur more operating costs such as the wages of part-time staff hired for specific projects or a rise in the cost of utilities — such as electricity, gas or water.
Unlike fixed expenses, you can control your variable expenses to leave room for profits. As a small business owner, it is vital to track and understand how the various costs change with the changes in the volume and output levels. The breakdown of these expenses determines the price level of the services and assists in many other aspects of the overall business strategy.
These costs are also the primary ingredients to various costing methods employed by businesses including job order costing, activity-based costing and process costing. The knowledge of the fixed and variable expenses is essential for identifying a profitable price level for its services. Wages payable is the line item that identifies how much in wages are owed to workers but have not yet been paid.
It is a liability account. When a wage expense is recorded it is a debit to the wage expenses account, which requires a credit to the wages payable account for the same amount until the wage is paid to the worker. Wages are typically paid to a worker in the pay period following the period in which the work was performed, so there is always a delay, which is reflected in the wages payable account.
A wage expense is an expense account that appears on the income statement while the wages payable account is a liability account that appears on the balance sheet.
A wage expense has to at least be equal to the minimum wage dictated by the federal government or the state government. The current minimum wage in the U. Many states have implemented minimum wages that are higher than the federal wage and employers in those states have to pay the higher state minimum wage.
Many companies pay a higher minimum wage than the federal or state minimum wage. Wage and salary are often used interchangeably but they refer to different types of payments for employment.
Wages most often refer to hourly pay. The worker is paid per hour for a set amount of hours per week. If they go over the set amount of hours, then they are usually paid overtime. Overtime pay can sometimes be higher than the regular hourly pay; sometimes 1.
Salary refers to a set amount of payment that does not change throughout the year and is usually quoted as an annual sum rather than hourly.
With salaried jobs, there is no set amount of hours an individual works, so if the person works 40 hours a week or 60 hours a week, there is no difference in pay. Salaried jobs usually also come with better benefits, such as k plans , better health insurance, life insurance, and flexible spending accounts FSA.
Department of Labor. Economic Policy Institute. Business Insider. Small Business Taxes. Actively scan device characteristics for identification. It is important to remember that all non-discretionary fixed costs will be incurred even if production or sales volume falls to zero.
In accounting, variable costs are costs that vary with production volume or business activity. Variable costs go up when a production company increases output and decrease when the company slows production. This is because the company may still be under contract or agreement with workers for direct labor or a supplier of direct materials. When these agreements expire, the company will be free to drop the costs. In accounting, all costs can be described as either fixed costs or variable costs.
Corporations looking for methods to reduce or eliminate expenses often analyze avoidable costs associated with underperforming or non-profitable product lines.
Fixed costs such as overhead are generally not preventable because they must be incurred whether a company sells one unit or a thousand units. In reality, variable costs are not entirely avoidable in a short timeframe. The conversion cost takes labor and overhead expenses into account, but not the cost of materials. A prime cost is the total direct costs, which may be fixed or variable, of manufacturing an item for sale. Businesses use prime costs as a way of measuring the total cost of the production inputs needed to create a given output.
Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Skip to content. He has edited technical manuals, newsletters and articles for several aviation and automotive companies and is currently the editor and publisher of "Auto Trends Magazine.
By Matthew C. Hiring Costs All employees cost companies money before they were even hired. Taxes An employee receives a base salary, but the government demands its cut in the form of taxes for Social Security, unemployment and Medicare. Fringe Benefits Beyond the base salary, employees expect to receive benefits, which are in many forms, according to the BLS.
Office Space Unless employees work remotely, every business must provide them with working space and related equipment. Related Equipment Office equipment costs for employees include furniture such as a desk, a chair and cabinets as well as electronic equipment, including a personal computer, software and a printer.
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