Fixed vs variable costs

Hi Carlos,

so far that you want to divide in fix and variable costs only, you can use the concept of marginal change in the output. Specifically, you can consider a cost variable if they increase with a marginal change in the output of the product. Thus all the costs that change with a marginal change in the output (raw material for example) can be considered variable. On the other hand, costs that do not change with a marginal change in output (as labour or real estate) can be considered fixed.

To be more accurate though you should introduce the concept of semi-fixed costs. These are costs that do not change with a marginal change in output, but can change if there is a significant enough increase in production. Assuming you have a graph with output on the horizontal axis and cost on the vertical axis, they are graphically represented by increase by steps.

Thus, the most appropriate definition would include the following:

• Variable costs: change with a marginal change in output
• Semi-fixed costs: do not change with a marginal change in output, but can change so far that there is a big enough increase in output
• Fixed costs: never change, whatever the output

Hope this helps,

Francesco

Hey anonymous,

A way of dealing with the type of costs that you presenting is to call them by their proper name: semi-fixed (or semi-variable) costs, i.e., their graph looks like a leather, as they are fixed for a certain amount of work/clients/capacity, but then if you want to expand further they become higher. This might seems a very technical discussion, but interviewers might expect from everyone who had studied accounting before to be able to discuss about it.

Best

Bruno

I actually think you can use the same logic that you use for a manufacturing case - you can only increase production so much before you have to invest in more tooling and real estate. What I would do is to identify how many incremental customers a rep or a server can handle and based on that and what the solution of the case is consider these costs either variable or fixed costs. For example if business is a food delivery service and your ideas to increase revenues results in an increase of revenues of 20% and current service reps have spare capacity of 25% and delivery team has spare capacity of 5%, I would consider service reps as fixed cost and delivery team as variable (then you can further distinguish between salaries, delivery vehicles, gas and mileage).

hope it helps,

andrea

Hi,

For service industries I will use the following:

• Labor - mainly fixed. Variable in special cases like 2-sided markets (e.g. taxi business)
• Marketing - Mainly fixed. Variable in case of discounts / subsidizing per order
• Supplies, distribution - variable
• Rent, tools, etc - Fixed

Best