Fixed costs
Fixed costs are the costs that do not change with the change in the level of output of goods or services. This means that such costs remain constant with an increase or decrease in the volume of output.
A common example of a fixed business cost is rent. If a company has to halt production, they still have to pay rent each month. Rent is a fixed cost because it occurs regardless of increases or decreases in the company’s activities.
Examples of fixed costs include:
- Salaries
- Rent
- Leases
- Insurance
- Property taxes
- Certain utilities (like trash removal)
As a business owner, you determine the fixed costs via contract agreements or cost schedules. Fixed costs only change when you enter into new contractual agreements or cost schedules.
Fixed costs can be categorized as either direct or indirect:
- Direct fixed costs could include costs like direct labor or rent.
- Indirect fixed costs may include depreciation, salaries, and office supplies.
Your business has to pay fixed costs regardless of any specific business activity. When totaled up, fixed, variable, and semi-variable costs are the total costs of your business operations.
Variable costs
Unlike fixed costs which are always the same, variable costs increase or decrease based on a company’s production. For example, a surfboard factory may double its staff to increase production just before summer begins and then return to normal staff levels in the fall.
Gasoline is a variable cost for a restaurant that offers food delivery. If there are no requests for delivery orders, the cost of gasoline is zero. When several food delivery requests are made, the restaurant’s gasoline costs go up. When the demand for delivery drops, the spending on gasoline also goes down.
Examples of variable costs include:
- Direct and raw materials
- Packaging
- Utility cost
- Payroll
- Sales commissions
Large increases or decreases in a company’s output can lead to variable costs in categories like utility bills, payroll, or distribution. The per-unit variable cost of production remains constant for a given level of output, but the per-unit variable cost increases as the volume of output increases.
Likewise, the per-unit variable costs decrease with the decrease in the level of output. You can calculate the total variable cost of your business operations by multiplying the quantity of output with the variable cost per unit of output.