Fixed and variable costs

What is meant by fixed and variable costs?

Fixed costs stay flat as volume changes within a period, while variable costs rise and fall with it. Rent, salaried staff, insurance and software are usually fixed. Materials, hourly field labor, fuel and commissions are usually variable. Some costs are mixed, such as a salaried technician who earns overtime when volume spikes.

Why it matters to a revenue leader

Cost structure explains why a revenue shortfall hurts more than expected, and why growth past a certain point is so profitable. In a services company, technician capacity behaves like a fixed cost: you pay the crew whether or not the schedule is full. That makes filling idle hours with service work valuable, and makes selling more than the crews can deliver expensive in overtime and subcontractors. Revenue leaders who understand the split make better calls on price and volume.

A branch has $250,000 of fixed monthly cost, and its variable costs run at 55 percent of revenue. At $600,000 of monthly revenue it earns $20,000. At $700,000 it earns $65,000: revenue rose 17 percent and profit more than tripled.