Fixed, Variable and Total Costs

The importance of costing and the consequent classification of activity costs are preponderant factors in making strategic decisions for a company. The competitiveness of a company can be achieved through the optimization of resources, namely through the efficient management of the resources used. Thus, to better understand the theme, we present the typology of most common costs in a commercial or industrial activity.

Fixed Costs

Fixed costs are those that always remain constant, during a financial year, and with great variations in the volume of activity. Within the group of fixed costs there are total fixed costs and fixed unit costs. Total fixed costs always remain constant during the year, regardless of the volume of activity. While fixed unit costs decrease as the volume of activity increases, that is, the more we produce or sell the more the unit fixed cost decreases. The lease of a space for the company’s warehouse is an example of fixed cost, as we cannot fail to pay the lease for not producing at a certain time, rents and depreciation are also examples.

Variable costs

Variable costs, as the name implies, vary in proportion to the volume of activity. The total variable costs increase when the volume of activity also increases, while the variable unit costs remain constant for whatever the volume of activity. Examples of variable costs are raw materials, as we only buy what we need and we will use it. Commissions, preparation for delivery, among many others are also examples of variable costs.

Semi-fixed costs

Semi-fixed costs are fixed at zero turnover but vary when the turnover increases. Example: workers’ wages. Imagine that we have 10 workers, we always have this cost given as fixed, because we will not be able to fire anyone just for producing less or stop producing at a certain time, however we increase production so much that we need more workers, so this cost becomes a cost semi-fixed.

Total costs

Finally, total costs are governed by the formula: Total Costs = Fixed Costs + Variable Costs. Of course, if there are semi-fixed costs they are also part of the total costs.

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