Managing costs is a crucial aspect of ensuring the long-term financial stability of an organization. In this regard, it is essential to clearly understand the differences between fixed, mixed, and variable costs.

Fixed costs

Fixed costsare expenses that remain constant regardless of the level of production or sales. These costs are not affected by fluctuations in business activity and are not dependent on the volume of sales we generate. It is essential to keep track of fixed costs as they contribute significantly to the overall financial stability of the business. Business owners can make informed decisions and ensure profitability by accurately identifying and managing fixed costs(Bragg, 2022). Examples of fixed costs in our company include office rent, salaries of top executives, and insurance premiums. Therefore, recognizing and comprehending fixed costs is a prerequisite for businesses to thrive and flourish. By keeping tabs on fixed costs, businesses can better manage their finances and plan for the future(Bragg, 2022).

Mixed Cost

As the name suggests, mixed costs have fixed and variable components. It means that the cost comprises a fixed amount plus a variable amount that varies with the level of production or sales.Mixed costis a cost type that combines both fixed and variable components. It is also a semi-variable cost(Rogers, 2019).A mixed costis a cost that has two parts: a fixed portion and a variable portion. The fixed portion of the cost remains constant regardless of the activity level, while the variable portion fluctuates based on the activity level. For instance, the salaries of our sales team are mixed costs since they receive a fixed salary plus a commission based on the number of sales they make.

Similarly, the cost of our internet services is a mixed cost since we pay a fixed amount each month for internet access, but if we go over our data limit, we have to pay extra, which is a variable cost.

Variable Cost

Variable costs are a crucial aspect of any business, as they are expenses that directly depend on the level of goods and services produced by the company. These costs are volume-related and change according to the output level. In other words, as the production level increases or decreases, so do the variable costs. It is important to note that not all variable costs are direct costs(Kenton, 2023).

Variable costsare expenses that change in direct proportion to the level of production or sales. These costs depend on the volume of sales we generate and increase or decrease accordingly. Examples of variable costs in our manufacturing department include raw materials, labor, and energy costs.

Similarly, our shipping costs are variable since they increase proportionately to the number of products we ship.

By understanding these different costs, our managers can make more informed decisions about resource allocation and budgeting. For example, if we know an unavoidable expense is a fixed cost, we can allocate resources accordingly and plan for it in our budget. If we know an unavoidable expense is a variable cost, we can adjust our production or sales targets to manage our costs more efficiently. In this way, we can ensure the long-term financial stability of our organization.

References:

Bragg, S. (2022, July 9).Fixed cost definition. AccountingTools. https://www.accountingtools.com/articles/fixed-cost

Kenton, W. (2023, May 1).Variable cost: What it is and how to calculate it. Investopedia. https://www.investopedia.com/terms/v/variablecost.asp

Rogers, K. (2019, April 10).Examples of mixed costs in accounting. Small Business - Chron.com. https://smallbusiness.chron.com/examples-mixed-costs-accounting-80566.html