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Working out your manufacturing over heads? Know the difference between fixed and variable costs

by , 01 September 2014
When you create a budget for your manufacturing costs, you must consider the different kinds of expenses you pay. Are they expenses you have to pay all the time? Or do you only pay them occasionally or in different amounts?

These are your fixed or variable costs and it's important to classify them correctly, otherwise you may have an unbalanced budget.

To help you ensure you do, we're explaining the kinds of fixed and variable costs you'll need to consider...

 

These are the variable manufacturing costs that make up your manufacturing overhead budget

 
Variable manufacturing costs: These change when sales increase. And these costs increase at a constant rate relative to the amount of product you're to make. 
 
For example, the thread you use to manufacture carpets varies with the number of carpets you manufacture.
 
Your raw materials are one of the most common types of variable manufacturing costs as all your material costs change as your product demand changes.
 
Another example of variable costs is the expense of running your machinery. The harder your machines need to work, the more expensive it is to run them.
 
So what are fixed costs? Read on to find out…
 
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Here are the fixed manufacturing costs that make up your manufacturing overhead budget

 
Fixed manufacturing overhead costs: These don't change much every quarter because they don't depend on the amount of units the buyer orders. 
 
The salaries you pay are your most common fixed costs and these only change when you get in new employees or you give employees a raise. For example, the supervisor at a factory gets a fixed amount each month/quarter for his services.
 
 
Now that you know the difference between your variable and fixed costs, ensure you budget for them correctly.
 

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