In order to increase the profitability of your firm, many factors come into play. Accounting services in Edmonton may tell you that you can increase profitability by improving your sales, raising the prices of your goods and services or by reducing your expenses. A company does not have much control over increasing its sales and prices as much as, it has on lowering its expenses. If you want to increase your profits by reducing expenses, then you should have some knowledge about expenses. There are two types of expenses, variable expenses and fixed expenses. The difference between variable expense and fixed expense is described in detail below.
The expenses which vary with a change in the number of units produced are known as variable expenses. Examples of variable expenses include the cost of raw materials, wages paid to labor, packaging of products and others. These expenses are incurred only when you start producing the units.
The expenses which remain constant irrespective of the change in the number of units for certain period of time are known as fixed expenses. However, fixed expenses will change when the production of units increases a certain number of units. Examples of fixed expenses include rent, power consumption, depreciation, insurance and others. These expenses are incurred even if there are no units produced.
Nature of Costs
Variable expenses vary as per the volume of units. An increase or decrease in the number of units has a direct effect on variable costs.
Fixed expenses remain the same for a long period of time. These expenses are based on time. Over time, the expenses such as electricity bills, factory rent will increase and so does the fixed expenses.
Another difference between variable expense and fixed expense is the cost per unit. In the case of variable expenses, the cost per unit will remain the same. This is because the total variable expenses vary with each unit. Therefore, the overall cost varies with each unit but the cost per unit is the same irrespective of an increase or decrease in the volume of production.
In the case of fixed expenses, the cost per unit decreases with the increase in the volume of production. For example, the cost of fixed expenses is $1000 for 100 units. Thus, the cost per unit will be $10. If the volume of units increases to 200 units, then the cost per unit will reduce to $5.
These were some of the basic difference between variable expense and fixed expense that any accounting services in Edmonton will tell you. In order to increase profitability, a firm should try to reduce both types of costs. Fixed expenses can be reduced when you produce an optimal number of units. Similarly, when there is a large volume of production, you can get economies of scale for raw materials or packaging. This helps in reducing the variable expenses. To know more about these expenses and their various implications on your business performance, get in touch with professional accounting services in Edmonton.