Fixed vs. Variable Costs: What You Need to Know

The Difference Between Fixed and Variable Costs

To accurately calculate your break-even point, you must understand the distinction between fixed and variable costs.

Fixed Costs

Fixed costs are expenses that remain constant regardless of your production volume or sales. Examples include:

• Rent or lease payments
• Salaries of permanent staff
• Insurance premiums
• Property taxes

Variable Costs

Variable costs fluctuate in direct proportion to your production or sales volume. Examples include:

• Raw materials
• Direct labor (e.g., hourly wages for production workers)
• Shipping and packaging costs
• Sales commissions

Why the Distinction Matters

Accurately categorizing your costs is essential for determining your contribution margin (Sales Price - Variable Cost). If you misclassify a variable cost as a fixed cost, your break-even calculation will be incorrect, potentially leading to poor pricing decisions.