They are the expenses that do not change from month to month. Other fixed costs might include:įixed costs are obligations that must be paid regardless of whether any products are sold or any profit is made.įor existing businesses, it is typically easy to determine fixed costs. Examples of Fixed CostsĬommon examples of fixed costs are the monthly payments on a business loan or the rent paid on a building. Fixed costs are relatively easy to predict but difficult to adjust. These amounts stay the same regardless of how much business the company does or how many employees it has. Typically, a fixed cost involves a specific amount paid on a monthly or annual basis. Fixed Costsįixed costs are those that seldom or never change. Learning to determine and control variable costs is an important challenge for every business owner and is essential to sustained profitability. You can use this information in determining breakeven points and determining your business budget. You can create accurate financial projections. Once you know your variable costs, you can correctly price your products and services. You may be able to increase the efficiency of your manufacturing methods or train employees to work faster. For instance, you may look for less-expensive raw materials or cheaper shipping methods. There are several ways to reduce variable costs. Variable costs are relatively easy to manage. If we have orders for 5,000 basketballs next month, we know our total variable costs will be approximately $26,000. Now that we know the variable costs, we can create accurate forecasts for coming months. So, the total variable cost for each basketball was $5.20. We can now calculate the total variable cost of a single basketball by dividing the monthly cost by the number of basketballs produced during the month. Your total cost for producing, selling, and shipping the basketballs, then, was $13,000. These operational costs add up to $3,500. In addition to the production expenses, it cost you $500 in electricity to power the manufacturing equipment, $1500 in commissions to the sales staff, and $1500 to ship the basketballs to the distributors. Adding up these amounts, your production cost for the month came to $9,500. To produce 2,500 balls last month, you spent $4,000 on materials, $3,000 on hourly labor, and $2,500 on packaging materials. In preparation for a holiday sale, the furniture company may need to increase the hours of its part-time employees, pay overtime wages, or bring on temporary help.Īdditional examples of variable costs include sales commissions, manufacturing and shipping supplies, and freight costs. The lumber supplier could provide a discount for larger orders or charge a premium for rush orders.Īnother common example of variable cost is hourly labor. The variable cost calculation might not always be straightforward. For instance, a furniture manufacturer needs to order more lumber to meet a sudden increase in demand. Raw material purchases are the most common variable costs. Conversely, the less you sell, the smaller your costs. The more services you sell, the greater your cost to provide and support those services. The more products you sell, the greater your cost to produce those products. Variations are generally due to the production volume of the company. These costs are often calculated from month to month. Variable CostsĪs the name might suggest, variable costs can go up or down over short periods of time. In this article, you will learn more about each kind of cost and ways you can control them to your best advantage. Each may need to be managed differently to protect the bottom line of your enterprise. Each kind of cost has its advantages and disadvantages. In general, variable costs relate to the number of items and services your company produces, while fixed costs relate to overhead expenses. To ensure that your business remains fiscally solvent and profitable, it is important to understand the different types of costs and how to manage them. Nearly every business has both fixed and variable costs.
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