Lessons · Accounting · fixed, variable and mixed costs
Fixed, variable, and the ones that are both
A variable cost changes in total with how much you make and stays the same for each unit. A fixed cost stays the same in total and falls per unit as volume rises. A mixed cost has one of each inside it.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
Every decision on this road depends on sorting costs this way first, and the per-unit figure is where people go wrong. A manager sees that a unit cost 9.40 to make last month and 8.70 this month, and concludes the factory got more efficient. Nothing got more efficient; they made more units, and the rent spread further.
How to think about it
Ask of each cost: if we made one more, would this go up. If yes it is variable. If we made none at all, would it still arrive. If yes it is fixed. If both are true it is mixed, and it has to be split before it can be used.
Worked example
Materials: 5.00 a unit, whatever the volumeVariable. Constant per unit, rising in total.
Factory rent: 3,400 a month, whatever the volumeFixed. Constant in total, falling per unit.
Rent per unit at 1,000 units = 3.40; at 2,000 units = 1.70The same cost. This is why a falling unit cost proves nothing on its own.
Electricity: a standing charge plus a rate per machine hourMixed. Neither one thing nor the other until it is split.
Your turn
A cost stays the same in total however many units are made. Name its kind.
A cost constant in total and falling per unit is a cost
Solve one, graded on the server
The trap
Comparing unit costs between two months of different volume and calling the difference performance. Fixed cost per unit moves with volume alone, so the comparison measures how busy the factory was, not how well it ran.