FC VC items

fixed costs
New answer on Nov 03, 2020
6 Answers
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Anonymous A asked on Nov 01, 2020

Maintenance and transport costs, fixed or variable?

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This depends on the case context and cannot be answered in general, e.g.

  • Maintaining an aircraft once a month independent from flight hours => fixed; maintaining manufacturing equipment every 1000 hours of operation => variable.
  • Transporting finished goods to retailers => variable; transporting your trade fair booth (marketing) from one fair to the next => fixed.

To prepare for these type of questions, it's pointless to memorize factoids without fully understanding the underlying principles. To succeed in a case, you'll need to build a business intuition that will allow you to make these decisions in a case, dependent on the context.

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Completely depends!

Remember, variable costs are NOT defined as those that change over time.

Variable costs are costs that change when one unit of good/service produced changes.

SG&A is the building and maintenance of assets. Assets are fixed costs.

However, maintenance for anything that needs it for each addition use is variable (oiling, repair worker hours, etc. etc.)

Same logic applies to transportation costs! Transport of oil through pipes is fixed (build the pipeline and then just pump oil through). Transport of oil through tankers/trucks would be variable (you need x more for x additional amount of oil produced)

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  • Transporation and Warehouse Operations are Variable Logistics Costs
  • Maintenance is Variable Industrial/Overhead Cost and so are Utilities, Raw Materials etc
  • Warehousing (rental, lease) is Fixed Cost

There can be nuances and definitions for certain companies and industries but for the purposes of case interview you are safe with above. Real life can be tricky which will require definition clarification and due diligence.

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Hello !

Depends on the case, can you provide the full prompt?

Cheers,

Clara

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Anonymous B replied on Nov 01, 2020

Both depend. Maintenance depends on whether it is a services model or not (e.g., aircraft engines). Transport cost (not sure whether you are referring to logistics or travel expenses) can in theory be both too but typically volume dependent variable costs.

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5

Hi,

It depends on a particular industry, but in the majority of industries it would be variable or semi-variable as well.

I would suggest that you should study different cost classification methods for your interview as FC/VC is not always the best approach.

You can think about the following classifications:

  • by function (production, Non-production, etc)
  • by nature (direct; indirect)
  • by element (labour, material, expenditures)
  • by business line (retail business cost, corporate business cost, etc)
  • by OPEX; CAPEX

Also don’t forget to review Activity Based Costing methodology which is highly useful for an interview.

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

Best,

Anton

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Henning gave the best answer

Henning

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