In general, companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile, as their profits are more dependent on the success of their sales. For example, if a company has total sales of $1,000 and total variable expenses of $200, its variable expense ratio would be 20%. Firstly, it allows you to identify areas where you may be overspending and find ways to reduce your expenses. Secondly, it provides a clear picture of your spending habits and helps you make informed financial decisions. Finally, tracking your variable expenses can help you set realistic financial goals and create a budget that works for you. The best time to plan your fixed and variable monthly expenses is at the beginning of each month.
Because it is a bill you pay every month and remains roughly the same, a cell phone is a fixed expense. Still, you can work on bringing cell phone costs down to make sure this fixed expense fits in your budget. While most variable costs represent discretionary spending (such as restaurants, Starbucks, and golf), some variable costs represent necessities.
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- Trimming your grocery bill is certainly possible and one way to reduce expenses, but discretionary spending should be your first target for cuts.
- The Contribution Margin provides us with information about the fixed costs, while the Variable Expense Ratio includes information about the variable costs.
- As you look at your upcoming bills, you should already know exactly what you’ll pay for fixed expenses.
What would your savings be if you didn’t go out for lunch or dinner at all in the next month? If you want to save, you need to be comfortable making tough decisions that may require a few lifestyle adjustments. Other expenses may change once every year or two (like rent), but these would still be considered fixed expenses since they’re the same every month. Since fixed expenses typically represent the biggest chunk of your budget, the money you save in this category can be quite substantial. Variable expenses can include essential expenses as well as discretionary spending.
Why would variable expenses significantly change at different times of the year?
Fixed expenses are always easier to account for because they don’t fluctuate as variable expenses do. This means that you can easily plan for them by setting aside money each month to cover the cost. It’s hard to feel in control of your finances when many costs are out of your hands. Fixed expenses such as car payments generally stay the same, but variable expenses change over time. When creating your budget, calculating your total fixed costs is fairly simple. If you happen to have a fixed expense you pay less frequently, you can determine the monthly expense by figuring out what you pay on that expense annually and dividing it by 12.
Those fixed monthly subscription services — Netflix, Spotify, Hulu and more — can really add up, so you might consider cutting some of them. Additionally, there may be opportunities to lower them by comparing other options. Perhaps a company will allow you to bundle them and save a chunk of cash versus your current providers.
Saving money on housing, on the other hand, might require you to move or refinance your mortgage. One of the key elements to gaining financial stability is learning how to budget your variable expenses. Since they are unpredictable, variable expenses may come up when we least expect them and derail our spending plans for the month. Sometimes, no matter how much you control your variable expenses, they still crop up unexpectedly and cause financial strain. You can mitigate this with a rainy day or emergency fund or by trimming your discretionary expenses.
An emergency fund will give you the padding you need to cover big expenses and give you peace of mind if you lose your job or source of income. If you’ve paid this variable for any length of time, you can look back at previous years’ bills or financial statements, like bank account statements or credit card statements. Take, for example, your electricity bill, which can vary drastically from season to season if you have air conditioning.
Why is it usually best to plan variable expenses after planning for fixed expenses?
The term cost refers to any expense that a business incurs during the manufacturing or production process for its goods and services. Put simply, it is the value of money companies spend on purchasing and selling items. Businesses incur two main types of costs when they produce their goods—variable and fixed costs. Budget your fixed expenses first, because they make up the majority of your budget and are usually set for longer periods of time. Your variable expenses fluctuate monthly and are easy to adjust as you go, so it’s easier to plan these around your fixed expenses. Your health insurance, car insurance, life insurance, and homeowners or renters insurance are also examples of fixed costs.
How a Variable Expense Works
However, if the company doesn’t produce any units, it won’t have any variable costs for producing the mugs. Similarly, if the company produces 1,000 units, the cost will rise to $2,000. If you can cut back on some variable costs in addition to your fixed monthly bills, you’ll free up more money to save for retirement, build an emergency fund, pay off debt, or invest. But the amount you pay in any given month could be different from previous payments or ones you’ll make in the future.
Contribution Margin
Then, allocate a certain amount of money to each one and spend only what you’ve designated. This way, you’ll know exactly how much cash you have to cover these shifting expenses. In some cases, an unexpected expense in your variable costs can throw your budget into turmoil.
Various individuals and entities in the business world use the variable expense ratio. Business owners and managers utilize it to assess cost structures and make pricing decisions, while financial analysts rely on it for evaluating a company’s financial health. If you accept credit cards as payment, you’ll need to pay transaction fees each time a customer uses their card. These fees can range from a few cents to several dollars, depending on the type of card and the amount of purchase.
For example, increased use of your car produces a corresponding increase in your variable expenses for fuel and car maintenance. Likewise, if you have guests staying over for an extended time, your variable expense for food might increase. A variable expense is a cost that alters in conjunction with some type of activity. Other variable expenses are commissions, billable labor, piece rate labor, and credit card fees. Many other expenses, such as rent expense, are fixed within a certain activity range. One of those cost profiles is a variable cost that only increases if the quantity of output also increases.
Therefore, if the business has sales of $10,000 in the month of June, the business will have a credit card expense of $300. The total credit card expense varies with sales because the fee has a constant rate of 3% of sales. If you want to save money on variable expenses, it may require some lifestyle adjustments. For example, cutting back or cutting out things like dinners out or new clothes are some simple ways to save. You could also save on groceries by planning meals, taking advantage of coupons or switching from name brands to generic. With debt repayment, you may be able to save by refinancing or consolidating bills.
You’d get $648.33, and could safely assume your average grocery bill might be around $650 per month. There is another type of expense category that’s referred to as “discretionary expenses.” These are “optional” purchases, such as entertainment and restaurants. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes.
In addition, variable costs are necessary to determine sale targets for a specific profit target. Commissions are often a percentage of a sales proceeds that is awarded to a company as additional compensation. Because commissions rise and fall in line with whatever underlying qualification the salesperson must hit, the expense varies (i.e. is variable) with different sales and use tax activity levels. Let’s consider a hypothetical example in the restaurant industry to demonstrate how to calculate and analyze the variable expense ratio. The Variable Expense Ratio enables analysis of the profitability and cost efficiency of the business. This allows the business to set the pricing of products and provide goals & profitability projections.
Essentially, these expenses are costs or spending categories that change over time. The more fixed costs a company has, the more revenue a company needs to generate to be able to break even, which means it needs to work harder to produce and sell its products. Other less common fixed expenses may include child support payments, alimony, back tax payments you’re making through an installment plan or payments made to satisfy a judgment from a lawsuit. These kinds of payments can be the same each month for the entire period of time in which you’re obligated to pay them. Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments.