Fixed vs. Variable Rates Using estimations and projections to create budgets

Learning Goals After completing the activities in this slideshow lecture you should be able to… Define fixed rates Define variable rates Identify whether a rate is fixed or variable Estimate yearly company spending through fixed and variable rate projections

What is a Fixed Cost? A FIXED COST is a cost that a company must pay for goods or services that constantly remains the same. It does not change based on an increase or decrease in sales volume of the company. When budgeting for yearly spending, any cost that we know for sure will be the same month in and month out is considered a fixed cost. A mortgage payment is an example of a fixed cost. We pay it every month and the bill is the same every month. FIXED COSTS can be accurately budgeted for because we know the EXACT price we will pay. MORTGAGE BUDGET: $5,200- January $5,200- February $5,200- March $5,200- April $5,200- May $5,200- June $5,200- July $5,200- August $5,200- September $5,200- October $5,200- November $5,200- December

Examples of Fixed Costs Monthly mortgage payments Monthly lease payments for a printing press or other type of equipment Vehicle, building, employee, etc… insurance Salaried employees Accountant/Lawyer costs if the company signs a contract with them

What is a Variable Cost? A VARIABLE COST is a cost that changes from month to month. It can and will change based on an increase or decrease in sales volume of the company. Variable costs make yearly budgeting difficult. In most circumstances, companies must use projections to estimate the cost for these cost center. An electric bill payment is an example of a variable cost. We pay it every month, but we can’t be certain of the exact price we will be paying until the electric company sends us a bill. VARIABLE COSTS can not be 100% accurately budgeted for because we don’t know the EXACT price we will pay. We can use PROJECTIONS to estimate the costs for budgeting purposes. ELECTRIC BUDGET: $260- January $403- February $398- March $167- April $444- May $623- June $890- July $786- August $457- September $302- October $220- November $306- December

Examples of Variable Costs Utilities (Gas, Electric, Water) Paper, Ink, and other printing supply costs Salaries of hourly and commission based workers Deliver costs Equipment breakdown maintenance

Budgeting With Fixed Costs Budgeting with FIXED COSTS is very straight forward. Use the following formula to calculate the yearly budget amount required for a fixed rate cost center. # of months payments are made in 1 year Total amount that should be budgeted for 1 operating year Monthly Cost x =

Budgeting With Fixed Costs Example 1: How much should Jones Printing Company budget annually (1 year) for their building lease. They’ve signed an agreement to pay $5,250 per month for the next 6 years. # of months payments are made in 1 year Total amount that should be budgeted for 1 operating year Monthly Cost x = $5,250 x 12 months = $63,000

Budgeting With Fixed Costs Example 2: (Try this one on your own) How much should American Printing Company budget annually (1 year) for their salaried employees? They have 60 employees that make a total of $67,250 per week.

Budgeting With Fixed Costs Example 2: (ANSWER) How much should American Printing Company budget annually (1 year) for their salaried employees? They have 60 employees that make a total of $67,250 per week. # of months payments are made in 1 year Total amount that should be budgeted for 1 operating year Monthly Cost x = $5,250 x 12 months = $63,000

What’s Next? HW: Fixed vs. Variable Rates Q1: Fixed vs. Variable Rates