You are doing a great job so far! We are fast approaching home plate in our discussion of job costing for your arts and crafts business. This article explains the importance of variable and fixed costs in total and per item. I also introduce breakeven point analysis, which you use to figure out how much revenue you need to bring in to cover your arts and crafts business costs.
Understanding Why the Distinction 'In Total' Is Relevant for Variable and Fixed Costs
In a previous job costing article explaining arts and crafts variable costs I emphasize these costs change in total as opposed to the explanation in the fixed cost article which states fixed costs don't change in total based on sales activity. This is a very important concept to understand as it's one of the foundations for effectively using job costing to figure out how much you need to charge for your arts or crafts to make enough of a profit to pay yourself adequate compensation.
Walking Through An Example of Fixed and Variable Costs
For example, let's say you hand craft leather watchbands to sell at craft shows and online through your website. Your variable cost to make each watchband is $15 and your fixed costs per month are $1,000. Now, suppose in August you sell 1,000 watchbands. Your variable costs are $15,000 ($15 multiplied by 1,000 bands) and your fixed costs are $1,000. This gives you a total cost of $16,000 for this level of watchband sales in your arts and crafts business.
Now using the same cost figures, if you sell 500 watchbands in September, your variable costs are $7,500 ($15 multiplied by 500 watches). Fixed costs stay the same at $1,000. Total costs for this level of activity is $8,500.
Understanding How Fixed Costs Change Per Arts or Crafts Item
Okay, so far so good? Now, I want to throw a small monkey wrench into the whole equation and explain how even though fixed costs are constant, they do fluctuate per art or craft item sold.
Looking back at the watchband examples from above, based on levels of activity, while variable costs are the same per watchband, in total, they will go up or down depending on how many watch bands you sell. In the first example, when you sold 1,000 watchbands your variable costs were $15,000; in the second example when sales were 500, variable costs dropped proportionately to $7,500.
Meanwhile, sell one band or a million, in total your fixed costs are the same - $1,000. However, fixed cost per watchband does change. Sell 1,000 watchbands and per band your fixed cost is $10. Sell 500 watchbands and your fixed cost per band is now $20. Goodness! The fixed cost per watch has doubled!Using Variable and Fixed Costs for Breakeven Point Analysis
And that is the cool thing about breakeven point analysis. It takes the complication of trying to figure out how sales levels affect profit out of the picture by using a systematic format to factor in your variable and fixed costs at different levels of sales volume.
If you've done adequate research prior to starting your arts and crafts business, you will known how much your fixed costs are. The same is true for each arts and crafts item variable cost. Part of your planning and design process is locating reliable raw material vendors and costing out your designs based on how much vendors charge for the raw materials you need.
The next few articles walk you through breakeven point analysis using Excel spreadsheets complete with the formulas so you can tailor the spreadsheets to your own arts and crafts business.