How to Determine what is a Fixed Cost and what is Variable Cost


In business, variables and fixed costs are parts of every company. It is because not all costs can be changed. The cost of providing water, for example, is fixed. The cost to provide electricity and internet to an office building is variable since it could be modified by the demand for the AC units or the WiFi hotspot on a given day at a given time. The variable costs are listed in the “Variable Costs” column in a business plan. Even if a company changes its prices for items, some of the costs stay fixed and, therefore, cannot be changed. During paying monthly expenses, the fixed cost may be used to pay fees left from previous months (e.g., rent, employees’ salaries, etc.).

There are many different types of fixed costs that can be present in a business. To determine if a price is fixed or variable, you must identify its purpose and purpose. Whether the cost of providing water to an office is fixed or variable depends on whether the cost of delivering that water remains the same regardless of how many people are using it. If it does, then the price is fixed no matter how many people use it. However, if you were to lower the number of people using that temporary water source, you would have lower costs because less water would have been used, and you could pay less for delivery.

A cost is considered fixed if it does not change, no matter what. The cost for delivery of water to an office building is a fixed cost because it remains the same no matter how many people are using it. Building an office building is considered a fixed cost because even if there are fewer people in that space, the rental cost will always be the same as if it were full. No matter how many people you have in that office, you must pay rent and related expenses monthly.

How Do Variable Costs Change

A variable cost can change depending on market prices or changes in the usage of a product or service. For example, if the price of bread goes up or if a company needs to go through extra measures to store and deliver bread to stores, then the cost will be higher than it would be otherwise. More people will buy bread to feel more comfortable eating food at home and still being able to eat a nice meal. This is seen on a large scale with products like coffee since much more coffee is consumed today than even 20 years ago. The price of coffee has increased due to the many factors that have changed in society over time, but so has the amount of coffee consumed because people’s tastes have also changed.

If a cost is variable, it can change depending on the possible variables that can affect its use. Costs that are fixed have a price that will not change. Providing water to an office building is a fixed cost because no matter how many people are there, they will still need water and must pay for it. In this example, there is no variable in whether they provide water to them or not because they must provide water due to health reasons. In this way, the delivery cost of water is variable.