Determining fixed cost and variable cost in accounting can be simple or complicated depending on the style of financial statements a company produces. Variable costs will be clearly labeled on a variable costing income statement, but you must dig deeper to identify variable costs on a typical absorption-style statement.
TL;DR (Too Long; Didn't Read)
Cost of goods sold is almost always explicitly labeled on an income statement, but other expenses may be grouped as "operating expenses". If this is the case, ask for a detailed breakdown of operating expenses to better identify variable costs.
Variable Versus Fixed Costs
Fixed costs don't vary based on a company's production or sales levels. Rent and property taxes are classic fixed cost examples; these expenses may increase, but they don't increase because of increased sales or production levels. Variable costs, on the other hand, increase and decrease based on sales and production levels. Common variable costs include:
- Cost of goods sold (which consists of direct materials, direct labor and manufacturing overhead)
- Shipping and delivery fees
- Utilities, such as water, electricity and gas
- Credit card fees
- Sales or production bonuses
Variable Costing Income Statement
If a company produces a variable costing income statement, determining variable costs is a straightforward process. Variable costing is an income statement used internally by management to evaluate and measure costs, and can sometimes be generated using a variable costing income statement Excel template. However, variable costing income statements don't comply with generally accepted accounting principles (GAAP), so a business won't file them with the Securities and Exchange Commission and they aren't often given to creditors and investors.
Variable costs are explicitly labeled on a variable costing income statement. Under sales revenue, there should be a line item labeled "Cost of Goods Sold" and "Variable Selling, General and Administrative Expenses". Sum these two line items to determine total variable costs. For example, if cost of goods sold is $100,000 and variable selling, general and administrative costs are $50,000, total variable costs are $150,000.
Absorption Costing Income State
To be in line with GAAP, it's more likely that the company will produce an absorption costing income statement. Absorption costing includes all the costs of a finished product, including materials and labor, in the cost of a finished product. You'll know that a financial statement used absorption costing if no contribution margin figure is listed in the income section.
Variable costs won't be explicitly labeled on the variable income statement. The best way to estimate variable costs is to identify any common variable costs and sum the total of all the line items.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.