How to Calculate Fixed & Variable Operating Income

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Calculating Fixed and Variable Costs
Calculating Fixed and Variable Costs (Image: financial report image by PaulPaladin from Fotolia.com)

In business there are two different types of costs: fixed and variable. Fixed costs are those costs that remain the same regardless of production. Common fixed costs are rent, capital leases and certain utilities. Variable costs, on the other hand, are those costs that change based on the level of production. That is, high levels of production generate higher variable costs, while fixed costs remain the same. Calculating fixed and variable operating income is easy if you know the fixed and variable costs.

Obtain an account statement from your financial account software or from finance if you're in a larger organization. Request a monthly account statement for the past 12 months.

Identify and sum fixed costs associated with operations. These are accounts that do not change directly with sales or production levels. Look for interest payments, administrative labor, tuition reimbursement, research and development--any line item that does not change with changes in production. Sum these together for an estimate of total fixed costs. Let's say the total fixed costs are $5,000 per month.

Identify and sum variable costs. These are costs that move directly with sales. This includes inventory, direct labor, electricity and any other cost that increases/decreases with increases/decreases in output. Let's say total variable costs range from $3,000 to $15,000 per month.

Calculating Operating Income
Calculating Operating Income (Image: Calculator image by Alhazm Salemi from Fotolia.com)

Subtract fixed costs from sales for fixed operating income. Let's say the sales for January were $50,000 and fixed costs were $5,000. Fixed operating income is $50,000 - $5,000 = $45,000.

Subtract variable costs from sales for variable operating income. Let's say sales were higher than normal in January, which increased production levels. The variable costs in January were $10,000. $50,000 - $10,000 = $40,000. This is the variable operating income.

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