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Anonymous A
on Jul 30, 2021
Global
I want to receive updates regarding this question via email.

How to know when to use (fixed & variable cost) vs. (direct & indirect cost)?

May I know, how can I learn to know when to use (fixed & variable cost) vs. (direct & indirect cost) under the cost branch?

Thank you so much

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Top answer
Ian
Coach
on Jul 30, 2021
Top US BCG / MBB Coach - 5,000 sessions |Tech, Platinion, Big 4 | 9/9 personal interviews passed | 95% candidate success

Hi there,

Ultimately, it depends on the case. Moreover, I personally actually don't like either..."I'd like to segment by FC and VC" and "I'd like to segment by direct and indirect costs" is just incredibly generic and adds no value!

Rather, break it down by what matters. Thematically, what major costs are here and what's a systematic approach to looking at costs.

Some helpful related Q&As:

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

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Francesco
Coach
on Jul 31, 2021
#1 Coach for Sessions (4.500+) | 1.500+ 5-Star Reviews | Proven Success: ➡ interviewoffers.com | Ex BCG | 10Y+ Coaching

Hi there,

You may use any of the two as they are both a MECE way to structure costs. In the end, you should use the one that helps you to brainstorm more easily the costs for a particular case, as after that division you will have to identify costs for each category.

Best,

Francesco

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When preparing for case interviews, you'll quickly find that "fixed costs" and "variable costs" always come up. These concepts are important not only for financial analysis but also for strategic decision-making in companies. Let’s explore what these costs are and how you can skillfully use them in your cases. ✨ What are Fixed and Variable Costs?Fixed Costs are expenses a company incurs regularly, regardless of how much it produces or sells. These costs stay constant whether the company is active or not. Typical fixed costs include:RentSalaries for full-time employeesAdministrative expensesDepreciationWhether a company sells a lot or just a little, these fixed costs still need to be covered. They form the basis of a company’s cost structure and are crucial for long-term planning.Variable Costs, however, directly depend on business activity and change with the production level. They increase as more is produced and decrease when production is reduced. Examples of variable costs include:Raw materialsEnergy costsWages for temporary staffAn important point is that variable costs ideally drop to zero when there is no production. This makes them particularly flexible, as they can adapt to the current business situation.Together, these two cost types – fixed and variable costs – form a company’s total costs. To get a complete picture of the company's financial position, it’s crucial to divide costs into these two categories.At this point, be sure to check out the profitability framework. Profit is calculated by subtracting total costs from revenue. To understand cost behavior, it’s essential to segment them into fixed and variable costs – a perfect exercise!You can find more frameworks in our Case Interview Basics. 🚀
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