Glossary
Fixed and variable costs
Fixed costs don't change with production volume (rent, salaries). Variable costs do (materials, energy). Distinguishing them is the foundation of cost control.
The fundamental difference
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Fixed costs: stay the same regardless of how much you produce or sell. Examples: rent, indirect staff salaries, depreciation, insurance. Even if production stops for a month, these costs remain.
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Variable costs: change in proportion to activity volume. Examples: raw materials, direct piece-rate labor, subcontracting, sales commissions. If you don't produce, these costs drop to zero.
Why the distinction matters
Knowing which costs are fixed and which are variable helps you:
- Calculate the break-even point: how much do I need to bill just to cover fixed costs?
- Understand the contribution margin: how much does each sale contribute toward covering fixed costs?
- Assess the impact of growth: if revenue grows but profit doesn't, the issue is often fixed costs growing faster than income.
A practical example
A company with €500,000 in annual fixed costs and an average contribution margin of 30% must generate at least €1,670,000 in revenue just to break even. Everything billed beyond that point generates profit.
If fixed costs rise to €600,000 (new hire, larger facility), the break-even point jumps to €2,000,000. The company needs €330,000 more in revenue just to stay where it was.
Learn more: Break-even point | How to calculate full cost