The cost It is the economic expense that an organization or company has for the production or distribution of a good or provision of a service. The total cost is given by the sum of the fixed cost and the variable cost.
What is the fixed cost?
The fixed cost It is that cost that an organization or company has that does not vary, since the company cannot do without this type of expenses that are essential for the activity that the organization carries out. For instance: the cost of renting a business premises, office or warehouse.
Fixed costs usually occur over a specified period of time and do not depend on the level of production; to greater or lesser production, the total fixed cost of a company remains stable.
These costs are usually paid monthly and can be modified over time according to the needs and situation of the company. Fixed costs vary according to the number of employees, the type of company or according to the goods or services provided.
Fixed cost is usually graphed with a horizontal line, since there is no variability in it. A company will always try to reduce costs to the minimum necessary for its growth.
What is variable cost?
The variable cost It is the cost that a company or organization has that is modified according to the sales volumes or the level of activity of the company. Variable cost increases when production increases and decreases when production decreases. For instance: a logistics company expands its fleet of trucks, it will need more fuel to provide its service.
The higher the production volume, the higher and more diverse the variable costs will be. The proper management that a company has with respect to variable cost will make said organization more or less competitive with respect to its competitors. Over time, variable costs can stabilize and be controlled.
The variable cost is graphed with a line in an upward direction (the higher the production, the higher the total variable cost).
Fixed cost examples
- Real estate taxes.
- Public services (electricity, gas, water).
- Rental of real estate (offices, warehouses).
- Insurance
- Office supplies.
- Internet service.
- Indirect labor.
- Surveillance staff.
- Administration expenses.
- Transport.
- Taxes (licenses, municipal taxes).
Variable cost examples
- Direct raw material.
- Direct inputs.
- General materials.
- Sales commissions.
- Containers and packaging.
- Specific taxes.
- Fuel and energy resources.
- Distribution costs.
- External suppliers.
- More examples in: Administrative expenses