Variable cost vs fixed cost
There are two main types of costs: variable and fixed.
A business’s fixed costs are those that remain the same despite the level of output for that month. Fixed costs are those that are incurred on a consistent basis regardless of business activities. This means that no matter how little you sell or produce that month, you’ll need to pay the same fixed expenses.
When trying to manipulate your expenses—for instance, trying to stay within budget or increase profit margins —variable costs are typically easier to reduce. This is because variable costs usually have more alternatives you can turn to, such as switching suppliers or increasing efficiencies. However, when cutting variable expenses, it’s essential that you avoid decreasing the quality of your product or service as a result.
Some common fixed costs include:
- Office space rent
- Loan payments
- Machinery rental
- Depreciation of assets
In addition to fixed and variable costs, there are also mixed costs—also known as semi-variable costs. Mixed costs are those that remain stable, or fixed, up to a certain number of units. Once that production volume is surpassed, the cost is based on each additional unit.
This can also apply to expenses that are partially fixed and partially variable. For example, paying for an employee who has a base salary but can also earn commission would be a mixed cost. Their salary is considered a fixed cost, but any commission paid is a variable cost because it’s based on units or dollar amount sold.