Determination of the productive activity of fixed and variable costs

Fixed and variable costs do not fluctuate with changes in the level of production or sales volume, since they are those that respond directly and proportionally to changes in the level of activity or volume, such as raw materials, wages per hour of production.

It is mentioned that this system "is oriented according to the behavior of costs, in such a way that only variable production costs are charged to each item, variable costs are considered as the only costs of the product, being those production costs that vary in a direct way according to the volume of activity.

This causes all other manufacturing costs to be treated as period costs. This system is used for cost control and decision making. In the same way, it is pointed out that variable costs "are those costs whose magnitude changes in direct proportion to the volume of operations carried out".

Variable costing can also be seen as an application of the concept of marginal analysis used by cost accounting in economics and emphasizing the contribution margin to cover fixed costs and profit generation. Now, as for the total cost of the product, the sum of fixed and variable costs divided by the number of units produced represents the unit cost of each product. The total cost of a product includes a wide range of expenses, including fixed and variable costs associated with the manufacture of the product.

To determine the annual product cost, the total fixed and variable costs for the year are added together, the total product cost is the sum of the fixed costs plus the variable costs, the estimate of the total product cost allows the preparation of the company's operating budgets, as well as establishing the tentative production schedule.