Understanding Fixed and Variable Costs

Experienced entrepreneur Bill Schantz has been leading Mid Atlantic Financial, LLC, as CEO and owner for more than three decades. Through Mid Atlantic Financial, he operates several companies, including Senior Settlements, Bedrock Financial, and Harper Financial. As owner and CEO, Bill Schantz is responsible for everything from recruiting and training to financial structures and budgeting, which involves determining and understanding costs.

The two main types of costs that a business incurs are fixed and variable costs. Fixed costs refer to costs that remain the same regardless of how much a company produces. These costs are usually predetermined and remain the same during a specific period. For example, employee salaries, rent, and telephone costs are all fixed costs attributed to businesses. If a company were to briefly stop operations, these costs would remain since they are not tied to business operations or production.

Meanwhile, variable costs are more directly related to sales volume and will either increase or decrease as sales change. The cost of direct materials, sales commissions, and shipping are all examples of variable expenses. Such expenses change from month to month depending on how a business performs, so planning for them can be more difficult. However, companies can manage variable costs to an extent, thus reducing their expenses and saving money.