Fixed and Variable Cost

Virtually all of your business's costs will fall, more or less neatly, into one of two categories: 
"Variable costs," which increase directly in proportion to the level of sales in dollars or units sold. Depending on your type of business, some examples would be cost of goods sold, sales commissions, shipping charges, delivery charges, costs of direct materials or supplies, wages of part-time or temporary employees, and sales or production bonuses. "Fixed costs," which remain the same regardless of your level of sales. Depending on your type of business, some typical examples would be rent, interest on debt, insurance, plant and equipment expenses, business licenses, and salary of permanent full-time workers.0000000000000000000000

 

All the costs faced by companies can be broken into two main categories: fixed costs and variable costs. Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc. Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc. In accounting they also often refer to mixed costs. These are simply costs that are part fixed and part variable. An example could be electricity--electricity usage may increase with production but if nothing is produced a factory still may require a certain amount of power just to maintain itself. Below is an example of a firm's cost schedule and a graph of the fixed and variable costs. Noticed that the fixed cost curve is flat and the variable cost curve has a constant upward slope

Fixed costs are anything that you have to pay regardless of the workload or the level of sales. They include rent, utilities, and executive salaries. Variable costs are lower when there is less production or lower sales and higher when there is more production or higher sales. They include cost of goods sold, commissions, and hourly Calculating Fixed and Variable Costs

Because variable costs involve sales, production or manufacturing of a product or service, its important to learn simple examples for calculating fixed and variable costs to determine your breakeven analysis. Lets first look at calculating both fixed and variable costs. Heres a simple example of calculating fixed and variable costs for a candle store:

Calculating Variable Costs Think of variable costs as anything that has to do with the production of your product or services. So, the calculation would be: Variable Costs = (cost per unit) divided (the number of units sold). If you sold candles and it cost you $10 to manufacture each and expected unit sales are 250; your cost of production would be $0.04 per unit or $1,000 in variable costs. Calculating Fixed Costs Fixed costs can be determined by simple addition. Once you determine your fixed costs, to obtain the total cost of your product or service, the calculation is total fixed costs plus your variable costs. Say your fixed costs per any given month are $500 and we already know from the example above that are variable cost is $0.04 per unit or $1,000. Total costs would equal both your fixed and variable costs; or $1,000 (variable) and $500 (fixed) for total costs of $1,500.
wages (because hourly workers work less when there is less to do).