Business Costs: Fixed and Variable

For management learners globally

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All businesses have two types of costs, fixed costs and variable costs. The items that make up these costs will depend on the type of business and its setup.

Fixed costs or Overheads

These are costs that will not change if the business increases or decreases business activity. Examples of fixed costs or overheads are rent for the business premises, interest on loans or business rates charged by local government/councils and salaries. It is worth remembering fixed costs may not be fixed for ever for example landlords may change the amount of rent or loans may be paid or increased. Fixed costs are said to be connected with time (time related) as they have to be paid regularly i.e. weekly monthly quarterly annually.

Variable Costs

These are costs that will change if business activity changes. This will include the total cost of goods or materials bought by a business.

Costs Dependant on the Business set up

There are some costs which for one business will be fixed and for others variable. Gas electricity water telephone and broadband are examples of these; some businesses will agree a fixed cost for these utilities with the company supplying the utility or the firm's landlord may include them as a fixed cost in the rent for the business premises. Other businesses will decide that it is better to pay a variable amount which changes based on how much gas, water, electricity etc that they have used.

Break-even Point

This is the point at which the total amount of money received from the sale of goods is exactly the same as the amount of money it cost to produce or buy the goods.