What refers to fixed costs: conditionality of costs and their relationship

Definition

Conditionally fixed costs are expenses that do not depend on the scale of production and sales, or sales of services. But you need to take into account that fixed costs can turn into variable ones. Fixed costs are contrasted with variable ones. Collectively, total expenses are formed.

Simply put, these are expenses that do not change throughout the budget period. In this case, the sales volume does not matter. But you need to take into account that these are conditionally fixed costs. That is, they are not permanent in the full sense of the word. The size of these expenses changes under the influence of changes in the scale of the enterprise's activities. For example, there are these factors that influence semi-fixed costs:

• Introduction to sale of new products.
• The emergence of new branches.

The scale of the enterprise's activities changes extremely slowly. That is why costs are called conditionally constant, and not just constant.

Fixed costs and the break-even point of the enterprise

Variable costs are part of the break-even point model. As we determined earlier, fixed costs do not depend on the volume of production/sales, and with an increase in output, the enterprise will reach a state where the profit from products sold will cover variable and fixed costs. This state is called the break-even point or the critical point when the enterprise reaches self-sufficiency. This point is calculated in order to predict and analyze the following indicators:

• at what critical volume of production and sales will the enterprise be competitive and profitable;
• what volume of sales must be made in order to create a zone of financial security for the enterprise;

Marginal profit (income) at the break-even point coincides with the enterprise's fixed costs. Domestic economists often use the term gross income instead of marginal profit. The more the marginal profit covers fixed costs, the higher the profitability of the enterprise. You can study the break-even point in more detail in the article “Break-even point. Graphs and example of model calculation in Excel. Advantages and disadvantages".

Examples of conditionally constant expenses

An enterprise usually incurs these semi-fixed costs:

• Rent payment. Most companies and businesses rent commercial premises. This could be renting an office, commercial premises, workshop, warehouse, lecture hall. A fixed rent is established. It does not depend on the scale of sales or income of the enterprise. Even if the company has not earned anything at all, it still must pay for the rented premises. That is, this consumption is stable and does not depend on production. Therefore, this is a conditionally constant waste.
• Administration salary. The administrative staff includes an accountant and a manager. As a rule, management personnel receive a fixed salary depending on the time worked. Its size usually does not depend on the scale of production or quantity sold. Consequently, wages form a semi-fixed expense. The salary may consist of a fixed and variable part. Conditionally variable costs include, for example, interest and the piecework element of wages.
• Depreciation. Depreciation is charged on machinery, various equipment, and vehicles. This is a constant cost, as any equipment is subject to wear and tear and obsolescence. It does not matter how many products are produced.
• Payment for services necessary to ensure the activities of the entity. For example, a company can only operate if housing and communal services are supplied to the premises: heating, water supply. This category includes the Internet, banking services, and security company services. That is, these are services that are not directly related to the company’s activities, but are necessary to ensure its operation.
• Tax payments. Any enterprise pays taxes. The basis for their calculation can be land, social payments, salaries, property rights.

These are those semi-fixed expenses that almost every company incurs.

Conditionally fixed and conditionally variable costs: examples of conditionally fixed costs.

In the article Fixed and variable costs examples , we gave detailed examples of such expenses, now we will show examples of changes in fixed and variable costs and explain why they are essentially conditionally fixed and conditionally variable costs .

1. Fixed costs in the form of rent when renting an office may change during the course of the entrepreneur’s activities. They can increase or decrease quantitatively - the rental price rises or falls, or the rented area changes. They can also change structurally: the entrepreneur bought out a rented office or bought his premises in another location. Quantitatively, they may decrease, because now the entrepreneur is charged depreciation, and it is lower than rental payments. They may also change structurally: to purchase his premises, the entrepreneur took out a loan, and now the total amount of fixed costs for maintaining the premises may remain the same, and the structure is partly depreciation, and partly interest on the loan.
2. The accounting department's salaries are a fixed cost. Over time, the volume of wage costs may increase (expansion of staff due to an increase in operations, types of activities), or may decrease - outsourcing of accounting to a specialized organization.
3. Tax payments. There are taxes that also apply to fixed costs: property tax, unified social tax on salaries of administrative personnel, UTII. The amounts of these taxes may also change during the course of business. The amount of property tax may increase due to an increase in the value of property (purchase of new property, revaluation of value), due to an increase in tax rates. It may also decrease (sale of property, revaluation of value). The amounts of other taxes related to fixed costs may also change. The transition to outsourcing accounting services does not imply the calculation of wages, therefore the unified social tax will also not be accrued.
4. Fixed costs can be changed by converting them into variables. For example, when an enterprise produces products and produces some of the components in-house. When the volume of orders decreases, it is more profitable to find a third-party manufacturer and receive components from it, thereby eliminating part of the fixed costs in the form of depreciation of equipment, its maintenance, depreciation of premises, selling it or leasing it. In this case, the cost of supplied components will be considered completely variable costs.

Advantages and disadvantages of semi-fixed expenses

Conditional-fixed spending has these advantages:

• Expenses do not change, and therefore it is easy to plan an enterprise budget.
• Easy to create a balance sheet.
• Ease of cost forecasting.
• Expenses do not appear unexpectedly.

FOR YOUR INFORMATION! Such costs also have disadvantages. The main disadvantage is that expenses will have to be borne even if the company does not have adequate income. Fixed costs cannot be ignored. For example, a company rents premises for commercial activities. This month she has not received any profit, but she will still have to pay rent.

Features of accounting for semi-fixed costs

Companies have the right to write off semi-fixed costs as a debit to account 90. But this is a theory. In practice, everything is somewhat different. For current accounting of expenses, account 26 is used. This account serves to summarize information about expenses not directly related to production. It is used to reflect these directions:

• Expenses for maintaining employees whose activities are not related to manufacturing.
• Depreciation and repair costs.
• Rental payments.
• Payment for consultations and audits.
• Management expenses.

General business expenses are accounted for in the DT account 26. It corresponds with the CT account. Expenses placed on account 26 are written off to the DT of accounts 20, 23, 29. If these are semi-fixed expenses, then they will be written off to the DT of account 90.

Account 25 takes into account these expenses:

• Maintenance of the transport fleet.
• Depreciation of objects used in production.
• Property insurance.
• Payment for heating and lighting services.
• Payment for the maintenance of the premises.
• Rent payment.
• Payment of salaries to employees who are engaged in production services.

The account is used by industrial entities. Sub-accounts can be opened for it:

1. Contents of technical objects.
2. General shop expenses.

Conditionally fixed expenses recorded on subaccount 25/2 are written off in the DT of account 90.

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The article was published in the journal “Accounting” No. 37(38), October 2009.

THEM. KINTSAK, Deputy Director for Audit, JLLC “Right Company”

Organizations are given the right to immediately write off general production and general business expenses as semi-fixed expenses in the debit of account 90 “Sales” . However, in practice this is not always possible.

As provided for by the Instructions for the Application of the Standard Chart of Accounts (approved by Decree of the Ministry of Finance of the Republic of Belarus dated May 30, 2003 No. 89, as amended on March 26, 2009; hereinafter referred to as the Instructions for the Application of the Standard Chart of Accounts), for current accounting and control over the implementation of the estimate of general expenses and other expenses is account 26 “General expenses” , which summarizes information on expenses for management needs not directly related to the production process.

In particular, this account may reflect:

• administrative and management expenses;
• expenses for maintaining general business personnel not related to the production process;
• depreciation charges and expenses for repairs of fixed assets for management and general economic purposes;
• rent for general business premises;
• expenses for payment of information, audit, consulting and other services;
• other administrative expenses similar in purpose.

The nomenclature of general business expenses items is established by ministries and departments in industry instructions for planning, accounting and calculating production costs.

General business expenses are accounted for as the debit of account 26 in correspondence with the credit of inventories accounts, settlements with personnel for wages, settlements with other organizations (individuals), etc.

Expenses recorded in account 26 are written off to the debit of accounts 20 “Main production” , 23 “Auxiliary production” (if auxiliary production produced products and work and provided services to the outside), 29 “Service production and farms” (if servicing production and farms performed work and services outsourced). Between various types of products produced, work performed and services provided, the amounts of general business expenses are distributed in the manner established by industry instructions for cost accounting and calculating product costs.

These expenses can be written off as semi-fixed expenses to the debit of account 90 .

Account 25 “General production expenses” reflects the following expenses:

• for the maintenance and operation of machinery and equipment;
• depreciation charges and costs for repairs of fixed assets and other property used in production;
• for insurance of the specified property;
• for heating, lighting and maintenance of premises;
• payment for rented premises, machinery, equipment and other fixed assets used in production;
• remuneration of workers engaged in production maintenance;
• similar in purpose.

This account is used by industrial, agricultural and other production organizations with a workshop management structure. Organizations with a shopless production management structure can account for these expenses in account 26 .

The following subaccounts can be opened for account 25

• 1 “Maintenance and operation of equipment”;
• 2 “General shop expenses.”

Expenses recorded on account 25 are written off to the debit of accounts 20, 23, 29 . Between various types of products produced, work performed and services provided, the amounts of overhead costs are distributed in the manner established by industry instructions for cost accounting and calculating product costs.

General production expenses recorded in subaccount 25/2 can be written off as semi-fixed expenses to the debit of account 90 .

It should be noted that this method of writing off expenses as semi-fixed is also applicable for the purposes of calculating income tax.

Thus, the procedure for recognizing costs for tax purposes is defined in Art. 3 of the Law of the Republic of Belarus of December 22, 1991 No. 1330-XII “On taxes on income and profit” (as amended on November 13, 2008; hereinafter referred to as the Law on Income Tax).

The procedure for reflecting (recognizing) costs of production and sale of products, goods (works, services) to determine taxable profit is established by law, taking into account the provisions of this article.

The Income Tax Law does not specify what legislation establishes the procedure for recognizing expenses. The only condition is that the procedure for recognizing costs for income tax purposes is established taking into account the provisions of Art. 3 of the said Law, i.e. should not contradict this article.

According to sub. 6-1 tbsp. 3 of the Law on Income Tax, costs for the production and sale of products, goods (works, services), taken into account for taxation, are reflected (recognized) in the reporting period to which they relate (on an accrual basis) regardless of the time (term) of payment (preliminary or subsequent).

For tax purposes, the procedure for recognizing costs is applied, similar to the procedure established for accounting purposes, unless otherwise established by the Law on Profit Tax. At the same time, when determining profit from the sale of manufactured goods (work, services), the costs attributable to actually sold goods (work, services) are taken, calculated on the basis of accounting data, taking into account the estimated adjustments made to such data as a result of tax accounting.

The calculation of costs attributable to actually sold goods (work, services) is carried out according to the methodology determined in accordance with the accounting policy of the organization adopted in relation to the calculation of the cost of goods sold (work, services) (subclause 6-1.3 of Article 3 of the Tax Law at a profit).

Therefore, if the accounting policy of the organization provides that general production and general business expenses as semi-fixed expenses are not included in the cost of products, works, services, but are written off in full directly to the debit of account 90, then such expenses reduce the tax base for income tax , if they correspond to the income received (the principle of matching income and expenses) and are listed in Art. 3 of the Law on Income Tax. Let’s say a recently registered organization does not yet have income due to the lack of activity, but already incurs expenses (rent, utilities, wages, etc.). She takes these expenses into account in account 26 and wants to write them off as a debit to account 90 . However, this is unacceptable since the organization has no income. Expenses before the start of activities cannot be recognized as such in accordance with the law.

The fact is that the Instructions for the Application of the Standard Chart of Accounts provide a brief description of synthetic accounts and subaccounts opened for them, disclose their structure and purpose, the economic content of generalized facts of economic activity, and the procedure for reflecting the most common of them.

Principles, rules and methods of accounting by organizations for individual assets, liabilities, financial and business transactions and others, incl. their assessments and groupings are established by regulations and other regulatory legal acts, guidelines on accounting issues.

In particular, the rules for organizing and maintaining accounting records of expenses for commercial and non-profit organizations (except for banks and non-banking financial institutions) and individual entrepreneurs who are not exempt in accordance with the legislative acts of the Republic of Belarus from the obligation to maintain accounting records and reporting (hereinafter referred to as organizations) , are defined in the Accounting Instructions “Organization Expenses”, approved by Decree of the Ministry of Finance of the Republic of Belarus dated December 26, 2003 No. 182 (as amended on March 31, 2008; hereinafter referred to as the Instructions on Organization Expenses).

Paragraph 3 of this Instruction establishes that costs are divided into:

• for expenses by type of activity;
• operating expenses;
• non-operating, incl. emergency expenses.

At the same time, expenses by type of activity include expenses that form:

• cost of goods sold, products, works, services;
• expenses for management, maintenance and organization of production (general production expenses in terms of semi-fixed expenses and (or) general business expenses, if, according to the accounting policy chosen by the organization, they are not included in the cost of products, works, services, but are written off in full directly to the debit of account 90 );
• expenses for the sale of goods, products, works, services.

The procedure for recognizing expenses is set out in Chapter 5 of the Instructions on Organizational Expenses. In particular, paragraph 17 of this chapter states that expenses are recognized in accounting taking into account the relationship between expenses incurred and revenues (correspondence between income and expenses).

Expenses are recognized in the reporting period in which the corresponding income was recognized, regardless of the time of actual receipt of funds in payment for goods, products, works, services sold (assuming the temporal certainty of the facts of economic activity).

If an organization, in accordance with accounting legislation, has adopted a procedure for recognizing revenue from the sale of goods, products, works, services after receipt of funds and other forms of payment, then expenses are recognized after receipt of payment (with the exception of operating expenses associated with the sale of non-current assets) (clause 18 of the Instructions on expenses of the organization).

Expenses by type of activity are reflected in the accounting records of the organization in the debit of account 90 in correspondence with the credit of accounts 25 (in terms of semi-fixed expenses), 26, 40 “Output of products, works, , 43 “Finished products”, 44 “Expenses for sales", 45 "Goods shipped" and other accounts, except for cases when regulatory legal acts establish a different procedure (clause 8 of the Instructions on expenses of the organization).

Expenses from activities cannot be recognized until the corresponding revenues are recognized. General production and (or) general business expenses in terms of semi-fixed ones can be written off in accordance with the organization’s accounting policy as a debit to account 90 only if they are recognized as expenses in accordance with the Instructions on the organization’s expenses. And they can be recognized only when the corresponding income is recognized.

So, for example, according to the Instructions for the Application of the Standard Chart of Accounts, the amounts of the actual cost of work and services performed in accounting can be reflected by an entry in the debit of account 90 and the credit of account 20 . However, this does not mean that if the organization does not have income from activities, then such correspondence accounts are drawn up. In this case, the actual cost of work and services performed is written off to the debit of account 90 if it is recognized as an expense in accordance with the law.

In accordance with the specified Instructions, expenses that were incurred in a given reporting period, but relate to future reporting periods determined by the relevant services of the enterprise or regulations, as well as an order on the accounting policy of the organization, are reflected in account 97 “Deferred expenses” .

taken into account in account 97 may include, among other things, expenses for the development of new enterprises, production facilities, workshops and units (start-up expenses).

Production expenses recorded in this account are written off to the debit of accounts 20, 23, 25, 26, 44 and others in equal parts in accordance with the approved accounting policy of the organization.

Thus, even if the accounting policy of the organization provides for the write-off of general production and general business expenses as conditionally constant in the debit of account 90 , but the organization does not carry out activities, then the expenses incurred before the start of activities (rent, utilities, wages and etc.), should be taken into account in account 97 .

The same principle of recognizing expenses incurred before the commencement of activities is applied for the purposes of calculating income tax.

According to sub. 6-1.1 art. 3 of the Law on Income Tax, expenses incurred before the start of the organization’s activities for the development of new production facilities, workshops and units (start-up costs) are reflected (recognized) in the manner prescribed by the organization’s accounting policy, but not earlier than from the moment the activity begins, production, work of workshops and units. This is evidenced by the provisions of Art. 3 of the Law on Income Tax, according to which the costs of production and sale of products, goods (work, services), taken into account for taxation, represent the valuation of products, goods (work, services), natural resources, raw materials used in the process of production and sale , materials, fuel, energy, fixed assets, intangible assets, labor resources and other expenses for their production and sale, reflected in accounting. The procedure for reflecting (recognizing) costs of production and sale of products, goods (works, services) to determine taxable profit is established by law, taking into account the provisions of this article. Costs for the production and sale of products, goods (works, services), taken into account for tax purposes, are determined on the basis of accounting and tax accounting documents.

Why is the volume of semi-fixed spending determined?

The company is recommended to calculate the amount of semi-fixed costs. This is necessary to establish the break-even point. Reaching the break-even point is the equality of the company's revenue and expenses, including semi-fixed expenses.

BY THE WAY! The established amount of semi-fixed expenses is also needed to optimize the business model. As part of optimization, those costs that can be reduced are reduced.

Determination of semi-fixed costs

Conditionally fixed expenses include costs that do not depend on the scale of production and sales. The list of these costs will be different for each enterprise. You just need to determine the necessary definitions of expenses and add them up. Typically these costs are:

• Depreciation.
• Expenses for security services.
• Property tax.
• Spending on advertising.
• Payment of rent.

The formula for calculating the totality of conditionally fixed costs is elementary. You just need to add up all the fixed costs.

Additional Information

Are loan interest and salary paid in the form of premiums classified as semi-fixed costs? This is usually true. Interest and bonuses are factors that usually do not depend on the scale of production and sales volumes. However, they may well change under the influence of other factors. Consequently, interest and bonuses may well be classified as semi-fixed expenses.

The problem with including salaries and interest in the category of regular expenses is that these areas lack an important feature - a stable size. Interest rates on loans usually change as the loan is repaid. As a rule, their size decreases. The size of the rewards also changes. It may depend on production successes and plan implementation.

That is, the issue of including premiums and interest in fixed expenses is not so clear-cut. It is recommended to solve this on an individual basis. It all depends on the state of affairs in a particular company.