Question

I am struggling to understand the difference in fixed, variable and mixed costs. I connect fixed costs to concepts such as rent and variable costs to something like materials for a product. I understand at that level. However if I consider terms like income before tax, income from continuing operations. net income or gross profit, I am stumped. My thought process is that variable costs would include revenue and operating expenses, fixed costs would include income tax expense and income before tax. Mixed would include cost of goods sold, revenue and selling and administrative expenses, EBITDA. Am I on the right path or did I fall down a rabbit hole?

Answer 1

Fixed vs variable cost is the difference in categorizing costs as either static or fluctuating when there is a change in the activity and sale volume.

fixed cost : these are predetermined expenses and remain same throughout a specific period whether business operations is continued or temporarily closed. such expenses do not vary with output . Examples are- rent, telephone and interest cost, employee salaries, property taxes, insurance premium etc.

variable costs : these cost change directly or proportionally to the changes in business activity level or volume like when output is zero variable cost will be zero. A common example is operational expenses that may increase and decrease based on business activity. More examples are-wages of part time staff, material cost, direct labour, taxes, commissions.

mixed cost : these cost are made up of fixed and variable cost.mixed cost example is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of cost of fuel expenses. More examples are cost of goods sold, selling and administrative expense can have both fixed and variable components.