Fixed and variable costs
Sort a business's costs into fixed and variable costs and calculate the variable cost per unit.
To know how many products you must sell, or what price you need, you first have to understand how your costs behave when sales go up or down. That is what fixed and variable costs describe.
What you will learn
- The difference between fixed costs, variable costs and mixed costs
- How to sort a list of real costs into these groups
- How to calculate the variable cost per unit and total fixed costs per month
- Why "fixed" does not mean "fixed forever"
Explanation
Fixed costs stay the same in a period regardless of how much you sell. Rent of €450 per month is the same whether you sell 10 or 300 candles.
Variable costs change in direct proportion to the number of units sold. If each candle needs €2.10 of wax, 100 candles need €210 of wax.
A unit is one item of what you sell: one candle, one cup of coffee, one hour of service.
Mixed costs (also called semi-variable costs) have a fixed part and a variable part, such as an electricity contract with a monthly base fee plus a price per kWh (kilowatt-hour). For planning, split them into the two parts or make a simple, stated assumption.
Fixed costs are only fixed within a relevant range: the range of activity you are planning for. If sales grow so much that you need a second workshop, rent changes.
Worked example
Nordlicht Candles (fictional) is a one-person business making hand-poured candles in a rented workshop.
Assumptions: costs are per month; the owner's own working time is not counted as a cost here; all amounts exclude VAT; shipping is paid by customers, so it is excluded.
| # | Cost | Amount | Type | Reason |
|---|---|---|---|---|
| 1 | Workshop rent | €450 / month | Fixed | Same every month |
| 2 | Website and shop subscription | €29 / month | Fixed | Flat monthly fee |
| 3 | Business insurance | €15 / month | Fixed | Does not depend on sales |
| 4 | Accounting software | €12 / month | Fixed | Flat monthly fee |
| 5 | Phone and internet | €40 / month | Fixed | Flat contract |
| 6 | Wax | €2.10 / candle | Variable | Needed for every candle |
| 7 | Fragrance oil | €1.20 / candle | Variable | Needed for every candle |
| 8 | Wick | €0.15 / candle | Variable | One per candle |
| 9 | Glass jar | €1.40 / candle | Variable | One per candle |
| 10 | Label | €0.25 / candle | Variable | One per candle |
| 11 | Gift box | €0.60 / candle | Variable | One per candle |
Step 1 – Total fixed costs per month: €450 + €29 + €15 + €12 + €40 = €546
Step 2 – Variable cost per candle: €2.10 + €1.20 + €0.15 + €1.40 + €0.25 + €0.60 = €5.70
Step 3 – Total costs at 100 candles: €546 + (100 × €5.70) = €546 + €570 = €1,116
Step 4 – Total costs at 200 candles: €546 + (200 × €5.70) = €546 + €1,140 = €1,686
Doubling output did not double total costs, because the €546 of fixed costs stayed the same.
Limitations: electricity for melting wax is a mixed cost and is left out to keep the example simple. Payment provider fees are often a percentage of each sale, which makes them variable; they are also excluded here.
Common mistake
Practice activity
Sort these costs for Rheinblick Coffee Cart (fictional) into fixed or variable. Then calculate the total fixed costs per month and the variable cost per cup. All amounts exclude VAT.
- Pitch fee: €600 / month
- Coffee beans: €0.35 / cup
- Espresso machine lease: €150 / month
- Milk: €0.25 / cup
- Insurance: €480 / year
- Cup and lid: €0.20 / cup
- Phone: €30 / month
- Sugar and stirrer: €0.05 / cup
- Accounting software and bookkeeping help: €30 / month
Show solution
- Fixed: pitch fee €600, machine lease €150, insurance €480 ÷ 12 = €40, phone €30, accounting €30
- Total fixed costs: €600 + €150 + €40 + €30 + €30 = €850 per month
- Variable: beans €0.35, milk €0.25, cup and lid €0.20, sugar and stirrer €0.05
- Variable cost per cup: €0.35 + €0.25 + €0.20 + €0.05 = €0.85
Limitations: milk use differs between drinks (an espresso uses none). Using one average per cup is a simplification that is fine for first planning.
Key takeaways
- Fixed costs stay the same per period; variable costs change with each unit sold.
- Total costs = fixed costs + (units × variable cost per unit).
- Split mixed costs or state a clear assumption.
- Convert annual costs to monthly amounts so nothing is missed.
Next step
In the next lesson, you will use the variable cost per unit to calculate the contribution margin.
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