Businesses have two basic types of costs---fixed cost and variable cost. Fixed costs consist of items such as rent, insurance and lease payments. Variable costs change in relation to a company's activities; this holds especially true for manufacturers. Typical variable costs include direct labour, direct materials, supplies and certain utilities.
The costs of direct materials vary depending on the amount of product manufactured. Typically, companies purchase enough materials to cover the expected production quantities. This quantity normally comes from a forecasted amount of demand. Most forecasts use historical data to statistically generate the future forecasted sales quantities. These quantities vary, thus when manufacturing produces the expected sales quantities, the cost associated with purchasing the direct materials vary as well. For example, in June a company expects to sell 1,000 ceiling fans but in December it expects to sell 300. The cost of raw materials to make the fans in June will be higher than the cost to make the fans in December.
Labor costs vary greatly depending on a number of factors. In the retail environment, seasonality plays a large role in the costs of labour. During the holiday season a retail store typically hires seasonal help to cover the influx of holiday shoppers, therefore it expects to have higher than average labour cost. The same holds true in manufacturing except manufacturers experience higher labour costs before the retail market. For example, a furniture retailer experiences higher labour costs during the Thanksgiving and Christmas seasons when it requires additional sales help on the sales floor, but the manufacturer of the furniture experiences the same increase in labour four to six months prior to the retailer because the manufacturer has to build and ship the goods before the seasonal rush.
One of the most containable sources of variable cost in any business comes in the form of office supplies. Office supply costs typically have two variables---quantity used and number of employees. As the number of employees fluctuates, so does the overall cost of supplies. Also, as the quantity of supplies used fluctuates, so does the cost associated with this centre. Companies can contain this cost simply by controlling the use of office supplies.
A variable cost that affects all businesses is fuel. Airline and transportation companies experience this first hand and it trickles down to all businesses involved. For example, an American retail furniture company manufactures its furniture in China. When fuel prices increase, the cost to transport the furniture from the manufacturing facility to the United States typically increases.
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