Fixed costs are those which, however incurred by the company regardless of the volume of activity carried out, do not undergo variations.
Variable costs are those that vary according to the units produced.
In reality, the distinction in practice is not so clear-cut.
In business practice there are costs that have both characteristics. However, the cost of electricity is fixed for the fee to be paid regardless of consumption and is variable in relation to the operation of the plants.
To break down the semivariable costs into its two components, there are several methods that it is not appropriate to report here.
The distinction between fixed costs and variable costs is less used than that between direct costs and indirect costs, not only due to practical difficulties, but also due to the increasing level of automation of the industrial system and to the extension of multiproduct production.
Furthermore, in services and administrative activities, this distinction is not only technically difficult, but also economically of little importance. The prevalence of fixed costs is such that the distinction is not appropriate and convenient.
However, the costs of raw materials and direct labor are considered as completely variable costs and the analysis is concentrated
on indirect costs, choosing, in principle, from the following solutions
– consider all indirect costs as fixed
– consider variable those items whose component variable exceeds 50% and those with a
fixed component greater than 50% are considered fixed ;
– consider fixed those mainly fixed expenses and consider all the others
variable – carefully analyze each expense item, classifying it as invariable, semi-variable and fixed and divide the semi-variable expenses into their fixed and variable parts.
The choice of the criterion must be made from time to time in relation to the degree of approximation that is desired and the costs that are to be borne for data collection.