Is it better to have more fixed costs or variable costs?
Daniel Santos
Updated on December 31, 2025
A company with greater fixed costs compared to variable costs may achieve higher margins as production increases since revenues increase but the costs will not. However, the margins may also reduce if production decreases.
Why should a business monitor the levels of both fixed and variable costs?
Monitoring the levels of both fixed and variable costs is important in a business. Changes in the volume of activity need to be managed in terms of the associated changes in costs. Profits can be weakened if the expenses of a business are high, as they consume valuable resources within a business.
Why is monitoring fixed costs important?
On the managerial level, assessing such cost helps to take a decision about investing in different assets such as plant, machinery and so on. For instance, if a company spends big on high direct labor costs, then it may invest in machinery (and increase the fixed component) to lower these high variable costs.
When should you use fixed costs and variable costs?
Variable costs and fixed costs, in economics, are the two main types of costs that a company incurs when producing goods and services. Variable costs vary with the amount of output produced, and fixed costs remain the same no matter how much a company produces.
Why variable costs may be separated from fixed costs?
Being able to separate your fixed costs from your variable costs allows you to calculate a very useful figure; your business’s break-even point. If you sell goods, or if you sell your services priced as units, the break-even point is how many units you need to sell in order to cover all your costs.
What are 3 variable costs?
Fixed vs. Variable Expenses Examples
| Fixed Expenses | Variable Expenses |
|---|---|
| Rent | Cost of raw materials |
| Property expenses (taxes, upkeep) | Distribution costs (shipping, restocking) |
| Depreciation | Utilities (tied to production) |
| Business insurance | Credit card transaction fees |
What are some examples of variable costs?
Common examples of variable costs include costs of goods sold (COGS), raw materials and inputs to production, packaging, wages and commissions, and certain utilities (for example, electricity or gas that increases with production capacity).
Are wages variable costs?
Wages paid to workers for their regular hours are a fixed cost. Any extra time they spend on the job is a variable cost.
When you operate a small business, you have two types of costs – fixed costs and variable costs. Fixed costs do not change with the amount of the product that you produce and sell, but variable costs do. A change in your fixed or variable costs affects your net income. It also affects your company’s breakeven point.
Why is monitoring fixed and variable costs important?
In short, knowing and managing variable costs is essential as you respond to changes in the marketplace and in your company’s growth patterns. A solid understanding of your company’s fixed and variable costs is what allows us to identify the profitable price level for its products or services.
How can you tell the difference between a fixed and a variable cost?
Variable costs vary based on the amount of output produced. Variable costs may include labor, commissions, and raw materials. Fixed costs remain the same regardless of production output. Fixed costs may include lease and rental payments, insurance, and interest payments.
Why do we need to separate mixed costs as variable and fixed costs?
Is it good to have high variable costs?
Companies with high variable costs need to produce less to break even but they also have lower profit margins than companies with high fixed costs, according to Business Dictionary.
Is payroll tax a fixed or variable cost?
Other common fixed cost expenses are advertising costs, payroll for salaried employees, payroll taxes, employee benefits, and office supplies.
Is payroll a fixed or variable expense?
What’s the difference between variable and fixed costing?
Under variable costing, companies charge off, or expense, all the fixed manufacturing costs during the period rather than deferring their expense and carrying them forward to the next period as part of inventory cost.
What are fixed and variable expenses in a budget?
Fixed and Variable Expenses Explained Businesses separate out costs for budgeting and other purposes based on how important it is that they be paid: Fixed costs must be paid, even if you don’t have any sales. For example, you must pay the rent on you business location, the utilities, and you must make the payment on your business loan.
What’s the difference between variable costing and absorption costing?
Because absorption costing defers costs, the ending inventory figure differs from that calculated using the variable costing method. As shown in (Figure), the inventory figure under absorption costing considers both variable and fixed manufacturing costs, whereas under variable costing, it only includes the variable manufacturing costs.
Which is an example of a variable cost?
Variable costs vary based on the amount of output, while fixed costs are the same regardless of production output. Examples of variable costs include labor and the cost of raw materials, while fixed costs may include lease and rental payments, insurance, and interest payments.
