Fixed Vs Variable Expenses: Whats The Difference?

Since they are unpredictable, variable expenses may come up when we least expect them and derail our spending plans for the month. The company faces the risk of loss if it produces less than 20,000 units. However, calendar year anything above this has limitless potential for yielding benefit for the company. Therefore, leverage rewards the company not choosing variable costs as long as the company can produce enough output.

Periodic expenses are those costs that are the same and repeat regularly but don’t occur every month (e.g., quarterly). They require planning ahead and budgeting to pay periodically when the expenses are due. These costs are not considered variable because they’re discretionary. 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 be quite substantial.

With fixed costs, you know the total cost, you know the due date, and adding both to your budget is easy peasy. Most of your fixed expenses are inescapable — you can’t exactly cut your house or car payments. However, you may be able to eliminate a few unnecessary fixed expenses. Those fixed monthly subscription services — Netflix, Spotify, Hulu and more — can really add up, so you might consider cutting some of them. Additionally, there may be opportunities to lower them by comparing other options.

Now that you have this number to work with, you can budget $450 every month for groceries—even though it’s a variable expense. If you spend less than the average one month, leave the money you didn’t spend alone so it’s there if you overspend the next month. A variable expense is an ongoing cost that changes from month to month. The cost of gas and certain utilities such as electricity and water depend on how much you consume and changing rates. Other examples include clothing, vacation costs, holiday gifts and eating out. Variable cost and average variable cost may not always be equal due to price increase or pricing discounts.

What is an example of variable expense?

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. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year. There are ways to control variable expenses on account of food by making choices that help reduce your food budget. Budget expenses can either remain the same every month or they can fluctuate. Variable expenses are those that can change based on things like weather, cost, demand, or many other variables. For this reason, variable costs are a required item for companies trying to determine their break-even point.

  • For instance, if a company purchases a product for $30 and is able to sell it for $50, the company’s cost of goods sold will be a constant rate of 60% ($30 / $50).
  • By setting your budget goals and then tracking your variable expenses, you can see where (and for what reasons) your variable expenses increase.
  • If you opt to set aside the same amount of money for short-term savings and another chunk for retirement monthly, you’ll put yourself in a financially secure position.
  • Unofficially, variable expenses are probably the most likely culprit for busting your budget.

Variable costs are usually the first expenses that people try to cut when they need to start saving money. Unfortunately, variable costs are also some of the toughest expenses to cut back on, because doing so requires a daily commitment to frugal decision-making. One of the key elements to gaining financial stability is learning how to budget your variable expenses.

Why is it usually best to plan variable expenses after planning for fixed expenses?

Firstly, it allows you to identify areas where you may be overspending and find ways to reduce your expenses. Secondly, it provides a clear picture of your spending habits and helps you make informed financial decisions. Finally, tracking your variable expenses can help you set realistic financial goals and create a budget that works for you. Tracking your variable expenses is an essential part of budgeting.

Example of Variable Costs

A company in such a case will need to evaluate why it cannot achieve economies of scale. In economies of scale, variable costs as a percentage of overall cost per unit decrease as the scale of production ramps up. Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A company must still pay its rent for the space it occupies to run its business operations irrespective of the volume of products manufactured and sold.

Essentially, these expenses are costs or spending categories that change over time. Your personal finances are not the only place you may encounter variable expenses. In a small business, a variable cost is an expense that changes according to production or, in some businesses, with changing weather conditions.

Optional variable expenses

First, track your monthly spending and deduct the total from your income. Ideally, you’ll have money left over rather than a zero or negative balance. The length of a budget will also affect what are considered variable expenses. For example, a mortgage might have an adjustable rate of interest, and therefore might go up or down depending on the market interest rate. Usually the first few years of an adjustable rate mortgage, however, are at a fixed interest rate. So if you look at a budget for a year, the mortgage payment may not increase.

The marginal cost will take into account the total cost of production, including both fixed and variable costs. Since fixed costs are static, however, the weight of fixed costs will decline as production scales up. When it comes to managing your finances, understanding the difference between fixed and variable expenses is crucial.

What Are Fixed and Variable Expenses?

Unlike variable expenses, fixed ones tend to be predictable and therefore easier to plan for. Examples of fixed expenses include mortgage payments, car insurance and cell phone bills. 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, the cost cut should not affect product or service quality as this would have an adverse effect on sales. By reducing its variable costs, a business increases its gross profit margin or contribution margin. Variable costs are any expenses that change based on how much a company produces and sells.

How to Budget for Fixed and Variable Expenses

This means that variable costs increase as production rises and decrease as production falls. Some of the most common types of variable costs include labor, utility expenses, commissions, and raw materials. A variable expense is a cost that alters in conjunction with some type of activity.

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