The Difference Between Fixed Expenses and Variable Expenses

Any costs that would remain constant, even if have zero business activity, are fixed costs. Since fixed costs are unrelated to a company’s production of goods or services, they are generally indirect. These costs are among two different types of business expenses that together result in their total costs. Although variable costs are quite often discretionary expenses, some may be necessities. Buying gas for your car each month is a variable expense, as are car repairs and maintenance.

Fixed Expense vs. Variable Expense

By tracking these costs in your budget, you’ll get a better sense for how much you’re spending on food and will be able to plan more effectively. Unlike fixed costs, variable costs are directly related to the cost of production of goods or services. Variable costs are commonly designated as the cost of goods sold (COGS), whereas fixed costs are not usually included in COGS.

What can I do to reduce my Fixed Expenses?

Once established, fixed costs do not change over the life of an agreement or cost schedule. Fixed cost refers to a business expense that doesn’t change even with an increase or decrease in the number of goods and services produced or sold. Fixed costs are commonly related to recurring expenses not directly related to production, such as rent, interest payments, insurance, depreciation, and property tax. If you need to start cutting back on costs, look at both your fixed and variable expenses. Fixed expenses are regularly occurring costs that generally don’t change in dollar amount.

Variable Expenses

If you could use some more breathing room in your budget, finding ways to save each month can help. How you approach saving money can vary, based on whether you’re trying to cut your fixed or variable expenses. Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments.

What Is a Fixed Expense and What Are Some Examples?

There are a few ways to reduce your fixed expenses, so be sure to explore your options. Fixed expenses can be very difficult to reduce, but not impossible. Fixed expenses are generally more difficult to reduce than variable expenses because they cannot be changed without significant effort or major sacrifices. Trimming variable costs, on the other hand, requires actively making multiple decisions every day about whether or not to buy certain items or participate in specific events. Most families, for example, spend variable amounts of money on groceries each month. In addition, you’re likely to spend different amounts each month on putting gasoline in your car and paying for necessary car repairs and maintenance.

The fixed cost ratio is a simple ratio that divides fixed costs by net sales to understand the proportion of fixed costs involved in production. Because it is a bill you pay every month and remains roughly the same, a cell phone is a fixed expense. Still, you can work on bringing cell phone deferred expense definition costs down to make sure this fixed expense fits in your budget. While most variable costs represent discretionary spending (such as restaurants, Starbucks, and golf), some variable costs represent necessities. These costs are not considered variable because they’re discretionary.

Although these bills are consistent each month, you may still be able to lower their costs. If you’re signed up for a monthly service that you rarely https://www.kelleysbookkeeping.com/organic-revenue-growth-definition/ use, there may be an alternative plan with a lower price. For example, consider a cheaper gym membership or a different streaming service.

1. For instance, someone who starts a new business would likely begin with fixed expenses for rent and management salaries.
2. Because it is a bill you pay every month and remains roughly the same, a cell phone is a fixed expense.
3. You still have the power to negotiate prices and explore alternatives in certain cases.
4. After all, if a company can reduce the cost of materials and labor, profits increase.

Rather, they’re “variable” because the amount that you spend differs from month to month. Since fixed expenses typically represent the biggest chunk of your budget, the money you save in this category can https://www.kelleysbookkeeping.com/ be quite substantial. Variable expenses can include essential expenses as well as discretionary spending. For instance, if you get sick, then a doctor visit may be a necessity that you need to cover.