Fixed cost vs Variable cost
Fixed costs are expenses that remain constant regardless of the level of production or sales, such as rent and salaries. Variable costs, on the other hand, fluctuate with the level of production or sales, such as raw materials and commissions. Understanding the distinction between fixed and variable costs is crucial for marketers to accurately assess the profitability of their campaigns and make informed budgeting decisions.
6 Key excerpts on "Fixed cost vs Variable cost"
eBook - ePub- Debi J Peverill(Author)
- 2018(Publication Date)
- Painless Financial Training Group Inc.(Publisher)
...In a business, the goal is to make money. If you are operating a non-profit organization, you still have to cover costs so breakeven can be just as important. To begin thinking about breakeven, we first have to understand the difference between a fixed and a variable cost. I bet you already have a pretty good idea of which is which! Remember the discussion above when we talked about product and period costs? Well, a cost can be more than one kind of thing. Who knew that a cost could have such a diverse life? Rent, which was the poster child above for a period cost, is also a fixed cost. You pay the same amount of rent for your office whether you go there all day every day or you only visit once a week. This is the definition of a fixed cost—a cost that stays the same no matter the activity level. So we need to think about this. How much do I have to make to cover this fixed cost? A variable cost is … wait for it … a cost that varies with an activity level. I bet you could see that coming. For example, sales commissions are a variable cost. Commission varies with two different things—the commission percentage you pay your sales people and the amount of sales. So sales commissions are a variable cost. We stuck-up types would say that there is more than one cost driver in the sales commission expense. A purely variable cost is one that with no activity at all is zero. So if you did not make a sale, the commission expense would be zero. Mixed Costs Life is not as simple as just fixed and variable however. Some costs are a little more complicated. A mixed cost has a fixed and a variable component to it. There is some base amount that the cost never goes under no matter what. Even at no activity there is a cost, but the cost increases as the activity level increases. Therefore, the cost has a fixed and a variable component. A cell phone monthly bill is an example of a mixed cost...
eBook - ePub- Clive Marsh(Author)
- 2012(Publication Date)
- Kogan Page(Publisher)
...CHAPTER SIX PRODUCT AND SERVICE COSTING AND PRICING I n this chapter we will discuss some of the principal methods of costing products and services, and how these may be used to determine profitability. Selling prices are, of course, determined by the market but an understanding of costs is essential in order to ensure that profitable sales are pursued. We will discuss: t ypes of cost; c ontribution, break-even point and marginal costing; a bsorption costing/standard costing; s elling prices and the sales mix. Types of cost: fixed, variable, semi-variable Three classifications of cost are: f ixed costs; v ariable costs; s emi-variable costs. Cost may also be called ‘direct’ – where they can be directly attributed to a particular product or service – or ‘indirect’ when they do not directly relate to a product or service. The three classifications are explained bel ow. Fixed costs Fixed costs are those that do not change within the budget period, which is usually one year. They are fixed at the start of the year and do not change substantially or at all with levels of production or other variable factors. Examples of fixed costs are: m anagement salaries (excluding performance bonuses); r ent; b usiness rates; i nsurance premiums; t axes; d epreciation (but see semi-variable costs below). It is unlikely that once agreed these types of cost will change within the year. For example, rent is usually fixed at the start of the period and so are rates and insurance. It can be argued that, over time, all costs can change. However, for our purposes we can assume that the above types of cost will remain largely fixed during the year. Variable costs Variable costs are the types of cost that will change given different levels of production, output or sales. For example, the total cost of vehicle fuel used in a year will depend on the miles driven by the vehicle. Fuel, would, therefore, be considered a variable cost...
eBook - ePub- Richard Kotas(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Whatever the sales, fixed costs remain constant. Examples of fixed costs are rent, rates, management salaries, administrative and office expenses and depreciation. All these accrue with the passage of time, and are, therefore, sometimes referred to as period costs. Variable costs are those which vary in proportion to the sales volume. Whatever the change in sales there is, for practical purposes, a proportional change in variable costs. The best examples of variable costs are food and beverage costs. When the volume of business increases by ten per cent there is normally a ten per cent increase in food and beverage costs. Conversely, a particular percentage decrease in the sales volume will be matched by that percentage decrease in food and beverage costs. In addition to costs which are fully fixed or fully variable there is a group described as semi-fixed costs (also referred to as semi-variable costs). These are costs which move in sympathy with but not in proportion to the volume of sales. Examples of semi-fixed costs are gas, electricity, telephone, breakages and renewals. Let us take an example. Suppose the cost of kitchen fuel required to produce 1,000 meals is £ 10. Quite clearly, if the output of the kitchen is increased by 100 per cent to 2,000 meals, there will be some increase in the cost of kitchen fuel. As all experienced caterers know, the increased cost of kitchen fuel will not be as much as £20. What happens then in the case of semi-fixed costs is that we have a change in the same direction, but not quite at the same rate, as the change in the volume of sales. To revert to our example, the increased cost of kitchen fuel may be £ 13, £ 14, £ 15 or some such figure, depending on the nature of the meals prepared, the equipment used and the cost-consciousness of the kitchen staff. The response of semi-fixed costs to changes in the level of activity will, therefore, vary from one semi-fixed cost to another and from one establishment to another...
eBook - ePub- Bob Cinnamon, Brian Helweg-Larsen(Authors)
- 2010(Publication Date)
- Kogan Page(Publisher)
...The balance sheet will show these materials as an asset, under ‘stocks’. Clearly, there is a cost to this stock, but it appears in the balance sheet and is only realised into the P&L account when you sell it. Further examples of variable costs are packaging (for distribution to customers), freight (to customers), commissions and import/export duties. If in doubt about whether a cost is variable, ask yourself, ‘Does this cost go up the more I sell, and if I sell nothing do I have no costs (in the P&L account)?’ If it does not meet these criteria, it is not a variable cost. Fixed costs Beware – the accountant defines a fixed cost as anything that is not a variable cost! In other words, if it does not meet the criteria above, it is a fixed cost. This is a prime example of confusing jargon, where words don’t mean what they appear to; your advertising bill may go up and down, month by month, but it is a fixed cost. The unit cost of your raw materials may be stable for years on end, but raw materials will be a variable cost. Figure 11.2 is a graph showing fixed costs. Figure 11.2 Fixed costs Fixed costs only behave like this over a limited range of values – for instance, rent may be the same whether you have an office full or empty, but if you need to rent a second office to hold more staff, the rent will go up to a new ‘fixed’ level. Controllable/non-controllable costs There are two categories of fixed costs: those that really are fixed (for the moment, in any case) and those that might vary. Accountants call the first group non-controllable or non-discretionary costs. The fixed costs that might vary, or, as an accountant would prefer to say, those that can be managed, are termed controllable or discretionary. Examples of discretionary costs include promotion, overtime, additional storage, temporary staff costs, maintenance, research and development, and training...
eBook - ePubValue-based Marketing Strategy
Pricing and Costs for Relationship Marketing
- Santiago Lopez(Author)
- 2016(Publication Date)
- Vernon Press(Publisher)
...Chapter 5 Costs 5.1 Variable Cost Variable costs can be defined as all those costs that vary in direct proportion with the level of sales; that is, the number of units sold. When sales increase, these costs also increase; they are a relatively constant percentage of sales. The unit variable cost tends to be stable and does not decrease as volume increases, unless the cost of some component decreases. Variable Cost includes: The cost of all direct materials that are part of finished goods and can be assigned to specific units. All labor costs directly traceable to specific products and actually paid based on units produced; that is, the amount paid for every shirt assembled in a garment factory (“piecework” payment). In contrast, if labor is paid on a monthly basis, independently of the level of sales or production, it would be considered a fixed cost. Production expenses that clearly vary in proportion to sales (or activity). Depending upon the production process these may include, for example, power, water, supplies, etc. Other administration, marketing and sales expenses that may have a variable component. This includes discounts, sales commissions, transportation and distribution expenses, etc. Again, this is true only if they can be traced directly to sales activity. Example: An item is purchased for resale at a cost of $ 50 and a selling price of $ 80. The variable cost is therefore 62.5% of the sales price (50/80). If 100 units are sold, total sales would be $ 8,000 and the total variable cost would be $ 5,000. If 10 additional units were sold, for a total of 110 units, total sales would be $ 8.800 and the total variable cost would be $ 5,500. Again, $ 5,500 is still 62.5% of $ 8,800. Total Variable cost is a constant percentage of total sales. Variable cost may be allocated, or assigned, to each unit produced and sold; this is “unit variable cost”...
eBook - ePub- Chris Gratton, Harry Arne Solberg(Authors)
- 2007(Publication Date)
- Routledge(Publisher)
...This categorisation, however, also depends on the time perspective. The longer the time perspective is, the better the ability to vary the level of production, and thus the higher the proportion of variable costs. Any company will be more flexible with regards to hiring inputs the longer the time perspective is. Fixed costs are independent of the level of production. Some of them are dependent on production, but not on the level being produced. When production closes down, these costs disappear. The level of these costs remains constant irrespective of the quantity being produced. In addition, some fixed costs do not depend on whether the firm is producing or not, which can apply to facility costs. It is only when the facilities are closed down that this cost element will vanish (Johnsen, 2001). Sports broadcasting will generate both categories of costs. Acquiring – and using – cameras, as an example, will cause fixed costs as well as variable costs. In the annual account, some of the fixed costs are measured in terms of depreciation, which expresses the reduction in value from using the inputs. There will also be variable costs, for example electricity costs. OPPORTUNITY COSTS Most of the inputs being used on sports broadcasting can alternatively produce other programmes. This applies to resources such as cameras, commentators and other staff. Some of these inputs will be more flexible than others. Cameras and the staff that operate them can be used on a wide range of programmes. A sports commentator on the other hand may not be the best alternative to host a news programme. However, the channel can alternatively employ people with other skills when they initially recruit commentators...
