Definition of Variable Costs
Variable costs are costs that vary with the volume of output. Variable costs are opposed to fixed costs, which add up to total costs. The main sign by which it is possible to determine whether costs are variable is their disappearance during a stop in production (Kumar, 2020). Note that variable costs are the most critical indicator of an enterprise in management accounting and are used to create plans to find ways to reduce their weight in total costs.
Variable costs have the main distinguishing feature, namely, they vary depending on the actual production volumes (Kumar, 2020). Variable costs include costs that are constant per unit of output, but their total amount is proportional to the volume of output. It includes the cost of raw materials, consumables, and energy resources involved in the primary production. It also implies the salary of the primary production staff (together with accruals) and the cost of transport services.
Scenario
The Helensville Symphony has $3,000,000 in fixed annual costs and spends $24 per attendee. With tickets priced at $100, how many must be sold yearly to break even?
Calculations
In this case, the variable cost per person attending the concert is $ 24. The average ticket price is $ 100, and the fixed cost is $ 3,000,000. In order for The Helensville Symphony to operate without loss, a minimum of 39,474 tickets must be sold (rounded). For this, it is necessary to subtract the variable costs ($ 24) from the average ticket price ($ 100).
As a result, we get $ 76. This amount formulates the net profit from a ticket per person, and in order to find out how many tickets need to be sold so that there is no loss, it is necessary to divide the fixed cost ($ 3,000,000) by the net profit ($ 76), resulting in 39,473 6. After rounding, we get 39,474, namely the number of tickets that need to be sold per year in order to work without loss.
Reference
Kumar, V. (2020). B.com cost accounting notes. Accounting Education.