Variable Cost vs Fixed Cost: What’s the Difference?

Categorizing your variable expenses enables better analysis and understanding of spending patterns. Some common expense categories include food, transportation, entertainment, clothing, and personal care. Allocating a budget limit to each category can help you monitor and control your spending effectively. In contrast to fixed expenses, variable expenses are flexible costs that tend to fluctuate in value from one period to another. These types of expenditures vary depending on certain factors such as personal preferences, lifestyle choices, and changes in circumstances. Fixed expenses include things like your mortgage payments, cell phone bill, loan payments, or car payment—regular budget items that are generally the same amount each month.

If a company plans to make more things, they need to know that variable costs will go up as well. This is crucial when making plans for growth or changes in their products. By understanding variable costs, a company can figure out how much it costs to make their products and what they need to charge to make a profit. Various individuals and entities in the business world use the variable expense ratio. Business owners and managers utilize it to assess cost structures and make pricing decisions, while financial analysts rely on it for evaluating a company’s financial health. Negotiating discounts with your suppliers or vendors is
another way to reduce variable expenses.

What Is a Variable Expense?

She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances. Another option in this scenario could be to switch to a cash back business credit card with a higher rewards rate, then use the cash
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  • A company that seeks to increase its profit by decreasing variable costs may need to cut down on fluctuating costs for raw materials, direct labor, and advertising.
  • However, you should end up about even over the course of the year since you’ll save on months where the bill is lower, stockpiling the surplus for months with a higher bill.
  • One reason for tracking and reviewing your variable expenses
    is to calculate how they affect the break even point or profitability of those goods or services.
  • The more fixed costs a company has, the more revenue a company needs to generate to be able to break even, which means it needs to work harder to produce and sell its products.

Meanwhile, fixed costs must still be paid even if production slows down significantly. Once you have a good understanding of your variable expenses, set realistic savings goals based on your financial priorities and long-term objectives. Allocate funds from your discretionary spending towards these goals, be it emergency savings, debt repayment, or saving for a particular milestone or purchase. When you make things in a factory, there are various kinds of expenses involved.

Understanding Variable Costs

Instantly, compare your best financial options based on your unique business data. Know what business financing you can qualify for before you apply, with Nav. Cost is used to describe the cost of acquiring an asset for the
business, or the one-time cost of a business that is paid upfront. In addition, you probably have semi-variable or semi-fixed
costs, which are a combination of both. 1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.9% – 25.9% per year and will be based on your credit history.

Key Considerations in Business

Generally, these expenses have a predetermined payment amount set forth in your agreement or contract. A variable expense is a bill you regularly pay with a cost that changes with each period. In some cases, the variable cost only shifts by mere pennies each month, making them easier to estimate. However, some can fluctuate dramatically, making it difficult to estimate it in your monthly budget.

What’s the Difference Between Fixed and Variable Expenses?

She is passionate about providing accessible content to enhance financial literacy. She graduated from the University of Texas at Austin with a bachelor’s degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle. When not working, she is probably paddle boarding, hopping on a flight or reading for her book club. Though we can’t review every available financial company or offer, we strive to make comprehensive, rigorous comparisons in order to highlight the best of them. The compensation we receive may impact how products and links appear on our site. Unofficially, variable expenses are probably the most likely culprit for busting your budget.

As your expenses change throughout the year, you may have more or less to dedicate to the variable costs in your budget, but every dollar helps. In fact, many of your budget items might be variable expenses rather than fixed, which can make budgeting for them a little more complicated. Note that variable expenses are not considered «variable» because they are discretionary or unnecessary, but because they are fluctuating. For example, your grocery bill can differ from month to month, which makes it variable, but it is not discretionary because it’s not an expense you can do without. While most variable costs represent discretionary spending (such as restaurants, Starbucks, and golf), some variable costs represent necessities. It’s much easier to budget for fixed expenses than it is to budget for a variable expense or discretionary expense.

While there might be some fixed costs like owning a shipping department with special equipment, many of the other costs go up and down with the quantity of items shipped. Some variable expenses are necessary, like groceries, while others, like movie tickets, are optional. Variable expenses can be difficult to budget for as they are unpredictable. It’s crucial to understand the impact variable expenses can have on your budget and find ways to manage them effectively. If you’ve paid this variable for any length of time, you can look back at previous years’ bills or financial statements, like bank account statements or credit card statements.

Importance of Tracking Variable Expenses

Variable expenses can be intimidating because you don’t know what the bill will be every month. However, they aren’t an absolute mystery, as there is historical data to help you determine what you can reasonably expect to pay every period. Pull out that crystal ball and take stock of big costs in the your taxable income next year. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes. While you could theoretically change your monthly mortgage payment by refinancing your loan or by appealing your property tax assessment, this is not an easy switch.

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