“Money in, money out, where did the money go?” – a familiar question for those in business. Just like football players battling for every ball on the field, businesses face countless expenses to survive and thrive. And one question many ponder is: Are variable costs recorded in the income statement? Let’s explore the answer with XEM BÓNG MOBILE!
What are Variable Costs?
Expert Definition
According to Professor Nguyen Van A, author of “Management Accounting for Businesses,” variable costs are expenses that change with production volume or sales revenue. In other words, variable costs increase as a business produces or sells more goods and services.
Illustrative Example
Imagine you’re in the business of selling football jerseys. For each jersey you sell, you incur costs for fabric, worker wages, and shipping. These costs increase with the number of jerseys you sell, and these are variable costs.
Why Variable Costs Should Be on the Income Statement
Nature of Variable Costs
Variable costs are directly related to a company’s production and business operations. Therefore, they directly impact business performance and must be recorded in the income statement to accurately reflect the company’s operational status.
Vietnamese Accounting Law
According to Vietnamese Accounting Law, variable costs are recorded in the income statement based on the following principles:
- Matching Principle: Accurately, fully, and promptly reflects the financial situation of the business.
- Prudence Principle: Revenue should not be recognized before it is actually earned, and expenses must be recognized as soon as they are incurred.
How to Record Variable Costs on the Income Statement
Steps to Implement
- Identify Variable Costs: Businesses need to classify costs to clearly identify which are variable costs.
- Record Variable Costs: Variable costs are recorded in the income statement according to accounting principles, including both direct and indirect costs related to production and business operations.
- Allocate Variable Costs: Variable costs are allocated to each product or service based on a reasonable basis.
Real-world Example
For example, the sports shoe company “Giày Bóng” has raw material costs of VND 100,000 per pair of shoes. If the company produces 1,000 pairs of shoes, the total variable cost will be VND 100,000,000 and will be recorded in the income statement.
Variable Costs and Profit
Impact of Variable Costs
Variable costs significantly affect a company’s profits. When variable costs increase, profits decrease, and vice versa. Therefore, businesses need to effectively manage variable costs to ensure profit optimization.
Illustrative Example
Suppose the Vietnamese national football team has 10 players, each earning a salary of VND 10 million per month. If the team wins a championship, each player will receive an additional bonus of VND 5 million. Thus, player salaries are variable costs because they change based on the team’s performance. If the team wins more matches, bonuses will increase, and variable costs will also increase, leading to a decrease in the team’s profit (or surplus).
Advice for Businesses
Effective Variable Cost Management
Businesses should focus on managing variable costs effectively, such as:
- Using cheaper but quality-assured raw material sources.
- Improving labor productivity to reduce labor costs.
- Seeking reputable logistics service providers to reduce shipping costs.
Important Notes
- Do not confuse variable costs with fixed costs. Fixed costs are expenses that do not change with production volume or sales revenue, such as rent and fixed salaries of management personnel.
- An effective variable cost management plan is essential. This helps businesses optimize profits and increase competitiveness in the market.
Conclusion
Variable costs are a crucial factor affecting a company’s business performance. Recording variable costs in the income statement is necessary to accurately reflect the company’s operational status. Businesses need to have an effective variable cost management plan to optimize profits and enhance market competitiveness.
Income Statement Example Highlighting Variable Costs
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