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. If you budget by paycheck or schedule automatic bill payments, having bills due at roughly the same time can help with avoiding late payments and the fees that go along with them. An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases. The company faces the risk of loss if it produces less than 20,000 units.

As prices for equipment and supplies rise, you’ll want to protect your business against inflation. Commission is also a variable cost as salespeople only get paid if they sell a product or service. Employees that are paid based on billable hours is another variable cost.

Variable Cost

This assumes, of course, that you’re able to pay the balance off in full before the promotional rate ends. You could also consider refinancing student loans or consolidating debts with a low-interest rate personal loan to save money. For example, raw materials may cost $0.50 per pound for the first 1,000 pounds. However, orders of greater than 1,000 pounds of raw material are charged $0.48. In either situation, the variable cost is the charge for the raw materials (either $0.50 per pound or $0.48 per pound). At Bankrate we strive to help you make smarter financial decisions.

It can change its entire labor force, managerial as well as line workers. They are fixed because they are paid out regularly and are independent of revenue level or production volume. But, other forms of labor are dependent on these factors, according to Accounting Bookkeeper360 Review 2023: Pricing, Features & More Tools. The upside of having variable expenses in your budget is that you have more control over them than you do with fixed expenses. A business that has a high proportion of variable expenses can usually generate a profit on a low sales level.

Variable vs Fixed Costs in Decision-Making

The average variable cost definition is the variable cost per unit. Companies with a higher proportion of fixed cost to variable cost will have a higher degree of operating leverage. This means that if the sales drop, the EBIT will drop at a higher rate for a company having a higher proportion of fixed cost compared to a company with a low level of fixed cost.

This happens when a company bills a client for the hours its employees work—they only get paid based on the hours the company can bill. Industries with high variable costs, like the service industry, that depends https://simple-accounting.org/becoming-a-certified-bookkeeper-step-by-step/ heavily on labor, are much more vulnerable to competition because there is less investment required to start up. If you want to save money on variable expenses, it may require some lifestyle adjustments.