What Is the Difference Between Fixed & Variable Deductions?
To accurately determine the profitability and viability of your business’ operations you need to have a good working knowledge of the fixed and variable deductions involved. These are the two categories into which all of the business’ costs fall and gauging them correctly is vital if the true picture of an enterprises’ operation is to be captured.
Other People Are Reading
-
Fixed Deductions
-
Fixed deductions are those business expenses that remain unaltered regardless of the level of sales achieved. Whilst these expenses are dependent on the type of business in question, some of the most common include business licenses, rent, salaries for permanent workers, debt interest, equipment and plant expenses and insurance.
Variable Deductions
-
Variable deductions on the other hand refer to those business costs that increase or decrease proportionately to the amount of sales achieved. These typically include expenses like sales commissions, costs of goods sold, wages for part-time workers, shipping and delivery charges, costs of materials and supplies etc.
-
Possibility of Having Combined Fixed and Variable Deductions
-
Some business costs can actually be seen to have components of both fixed and variable deductions in that a certain minimum expense has to be used but more of the same must be used with an increasing volume of sales. For example, you can probably consider utilities like phone or Internet access.
Inherent Characteristics of Fixed and Variable Deductions
-
In the truest sense, fixed deductions remain unaltered despite changes in sales volumes and production levels. These costs are however open to changes over time and rightfully so. The most basic example to clarify this pointer is the monthly rent. This expense is only fixed for the duration that the property owner has specified – once he decides to hike it, the fixed deduction is increased. Other fixed deductions are the subject of a business owner’s discretion including promotional and advertising costs. Quite evidently, such expenses will not remain uniform figures from one month to the next.
Generally, total fixed deductions will remain unaltered with increasing volumes of production. In this scenario, the fixed deductions per unit produced will decline. Total variable deductions increase in proportion to the increasing volumes of production but the variable deductions per unit produced remain constant.
Importance of Determining these Costs
-
Perhaps the greatest help that comes with determining a business’ fixed and variable deductions has to do with the evaluation of the break-even point, BEP. This is the point at which the business’ expenses and revenues are equal. With knowledge on it a business owner will be in a better position to price his products and/or services effectively and indeed adopt an effective business strategy to ensure profitability.
-
