Variable vs Fixed Costs

Variable vs Fixed Costs Definition

In accounting, a distinction is often made between variable vs fixed costs. Variable costs change with activity or production volume. In comparison, fixed costs remain constant regardless of activity or production volume.

In accounting, all costs are either fixed costs or variable costs. Variable costs are inventoriable costs. That means accountants allocate fixed costs to units of production. Then they are recorded in inventory accounts, such as cost of goods sold. Fixed costs, on the other hand, are all costs that are not inventoriable costs. All costs that do not fluctuate directly with production volume are fixed costs. Fixed costs include indirect costs and manufacturing overhead costs.

When comparing fixed costs to variable costs, or when trying to determine whether a cost is fixed or variable, simply ask whether or not the particular cost would change if the company stopped its production or primary business activities. If the company would continue to incur the cost, it is a fixed cost. If the company no longer incurs the cost, then it is most likely a variable cost.

Variable vs Fixed Costs Examples

For example, if a telephone company charges a per-minute rate, then that would be a variable cost. A twenty minute phone call would cost more than a ten minute phone call. A good example of a fixed cost is rent. If a company rents a warehouse, it must pay rent for the warehouse whether it is full of inventory or completely vacant.

Other examples of fixed costs include executives’ salaries, interest expenses, depreciation, and insurance expenses. Examples of variable costs include direct labor and direct materials costs.

Variable vs Fixed Costs and Decision-Making

When making production-related decisions, should managers consider fixed costs or only variable costs? Generally speaking, variable costs are more relevant to production decisions than fixed costs.

For example, if a manager is deciding between keeping production levels constant or increasing production, then the primary factors in this decision will be the variable or incremental costs of the production of additional units of output. It would not be the fixed costs related to the operations that cannot be altered and will not change with the level of production. Therefore, in most straightforward instances, fixed costs are not relevant for production decision, and incremental costs, or variable costs, are relevant for these decisions.

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variable vs fixed costs

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variable vs fixed costs

See Also:
Absorption vs Variable Costing
Semi Variable Costs
Sunk Costs
Marginal Costs
Average Cost

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13 Responses to Variable vs Fixed Costs

  1. Mr Smith April 25, 2016 at 6:15 pm #

    Very useful, thank you.

  2. Miss S July 27, 2016 at 9:52 am #

    What happens if fixed costs are considerably higher than variable costs?

    • Mikael July 19, 2017 at 4:48 am #

      Nothing, it depends greatly on the type of industry you are in.

  3. Akolo August 12, 2016 at 8:06 am #

    Very resourceful and understandable.
    But in a situation where output need to be increase and the current machines are operating at maximum level,Then the need for a new machine arise… What will the cost of incurring that machine be classified as ?

  4. Marry August 29, 2016 at 2:28 pm #

    “We only classify cost of goods sold and operating expenses as fixed, variable, or mixed”.
    https://quizlet.com/12868358/cost-classification-flash-cards/

    based on this info above, Interest expense is not an operating expense, so it is not a fixed cost, only a period cost, like an Income tax. However, you have classified interest expense as a fixed cost above.

    What do you think? Which is right?

    Thanks in advance for your response

    M. Marry

  5. Getachew September 19, 2016 at 12:50 am #

    Dear Gentlemen,

    I want to know whether spare part is variable or fixed cost.

  6. Getachew September 19, 2016 at 12:50 am #

    Is spare part variable or fixed cos?

    • DNA December 22, 2016 at 3:35 am #

      spare part is a variable cost, it fall under production supplies, only when the machine is down then it will be required ..same as machine oil etc

  7. catherine November 26, 2016 at 12:13 pm #

    Well Explanation & well organized sentences to help in mutual understanding of this topic .

  8. Chris January 22, 2017 at 7:51 am #

    Hello,

    Thank you for the post. I’m trying to figure out how to break down the price of a unit to be sold into the portions of the price that covers fixed, variable, and profit per unit. Would you happen to have a post or know of a resource that may be helpful?

    All the best,

  9. Salam abutaha March 27, 2017 at 2:38 pm #

    Did the variable costs are controllable and fixed cost are no controllable .? Why ??

  10. Orie October 12, 2017 at 10:59 am #

    what are the variable cost of Mobile application?

  11. Ezinne December 20, 2017 at 12:01 pm #

    Please what are the effect of classifying cost into fixed cost

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