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Fixed vs. Variable Rates
Using estimations and projections to create budgets
Learning Goals A"er comple+ng the ac+vi+es in this slideshow lecture you should be able to… 1. 
Define fixed rates 2. 
Define variable rates 3. 
Iden5fy whether a rate is fixed or variable 4. 
Es5mate yearly company spending through fixed and variable rate projec5ons 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. MORTGAGE BUDGET: When budge5ng for yearly spending, any cost that we know for sure will be the same month in and month out is considered a fixed cost. $5,200-­‐ April A mortgage payment is an example of a fixed cost. We pay it every month and the bill is the same every month. $5,200-­‐ July FIXED COSTS can be accurately budgeted for because we know the EXACT price we will pay. $5,200-­‐ January $5,200-­‐ February $5,200-­‐ March $5,200-­‐ May $5,200-­‐ June $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 prin5ng 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. ELECTRIC BUDGET: Variable costs make yearly budge5ng difficult. In most circumstances, companies must use projec5ons to es5mate the cost for these cost center. $398-­‐ March 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 un5l 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 es+mate the costs for budge+ng purposes. $260-­‐ January $403-­‐ February $167-­‐ April $444-­‐ May $623-­‐ June $890-­‐ July $786-­‐ August $457-­‐ September $302-­‐ October $220-­‐ November $306-­‐ December Examples of Variable Costs   U5li5es (Gas, Electric, Water)   Paper, Ink, and other prin5ng supply costs   Salaries of hourly and commission based workers   Deliver costs   Equipment breakdown maintenance Budgeting With Fixed Costs Budge5ng with FIXED COSTS is very straight forward. Use the following formula to calculate the yearly budget amount required for a fixed rate cost center. Monthly Cost x # of months payments are made in 1 year = Total amount that should be budgeted for 1 opera+ng year Budgeting With Fixed Costs Example 1: How much should Jones Prin5ng 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. Monthly Cost x # of months payments are made in 1 year $5,250 x 12 months = Total amount that should be budgeted for 1 opera+ng year = $63,000 Budgeting With Fixed Costs Example 2: (Try this one on your own) How much should American Prin5ng 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 Prin5ng Company budget annually (1 year) for their salaried employees? They have 60 employees that make a total of $67,250 per week. $67,250 x 52 12 months/yr $291,416.67 x # of months payments are made in 1 year = Total amount that should be budgeted for 1 opera+ng year x 12 months = $3,497,000 Projecting With Variable Costs Budge5ng with VARIABLE COSTS is a lihle more tricky. We can not be 100% certain what our variable cost expenses will be. We can s5ll budget for them, but they are consider projec5ons because we try to project or take an educated guess at what the costs will be. The best way to project what variable cost spending will be is to look at the costs from the year before. If we spend $900 on our electric bill in January 2010 we should budget at least $900 for the January 2011 bill. Use the following formula for projec5ng variable costs for yearly budge5ng. Last year’s averaged monthly cost x 12 months = Total amount that should be budgeted for 1 opera+ng year Projecting With Variable Costs Example 1: 2010 ELECTRIC BILLS: How much should Jones Prin5ng Company budget for the fiscal year 2012 for their electric bill payments. Their 2011 bills are posted to the right. $260-­‐ January $403-­‐ February $398-­‐ March $167-­‐ April $5,256 12 months x 12 months = At least $5,256 should be budgeted for 2012. $444-­‐ May $623-­‐ June $890-­‐ July $786-­‐ August $457-­‐ September $302-­‐ October $220-­‐ November $306-­‐ December Projecting With Variable Costs Example 2: (Try this one on your own) How much should American Prin5ng Company budget for the fiscal year 2012 for their hourly employees. They paid 34 employees an average of $13 per hour for an average of 38 hours per week in 2011. How much should they budget for hourly wages in 2012? Projecting With Variable Costs Example 2: (Try this one on your own) How much should American Prin5ng Company budget for the fiscal year 2012 for their hourly employees. They paid 34 employees an average of $13 per hour for an average of 38 hours per week in 2011. How much should they budget for hourly wages in 2012? $13 x 38 hours x 52 weeks x 34 employees 12 months x 12 months = ??? x 12 months = At least $873,392 should be budgeted for 2012. $873,392 12 months +
What’s Next?
HW: Fixed vs. Variable Rates
Q1: Fixed vs. Variable Rates
Q2: Fixed vs. Variable Rates