Is Advertising a Variable Cost?
As competition increases, businesses need to maintain their current customers and attract new ones. Advertising helps them do this. Businesses use advertising to increase the number of customers visiting their store, to create or enhance their public image or to promote an event. They advertise in many ways, including placing ads in newspapers or on the radio, by issuing press releases or by scheduling interviews. Advertising represents an expense to the business and may be a fixed or variable cost.
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Fixed Cost
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Fixed costs remain the same for the business throughout the entire year. The company may pay this expense on an annual basis or several times during the year. It calculates the total expense for the year and divides this number by the number of periods. The company records the same amount in the financial records each period for a fixed cost. Fixed costs can change from year to year, but not within the year.
Variable Cost
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Variable costs change as the level of activity changes during the year. The activity level may be based on production quantity, sales quantity or labor hours. Companies pay variable expenses as they incur them throughout the year, calculating a rate per unit. Each period, the company multiplies this rate by the activity level to determine what amount to record in the financial records.
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Fixed Advertising Expense
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Companies incur fixed advertising expenses for a variety of reasons. Some companies enter a contract with an advertising agency. The agency handles all of the company's advertising needs and charges a monthly fee. Or, the company might place a recurring ad in a print publication. The ad runs regardless of the company’s activities. These both represent fixed advertising expenses.
Variable Advertising Expense
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Companies incur variable advertising expenses in several ways. Some companies include coupons with individual products. Each product produced includes the coupon and represents the variable activity. The coupon represents the expense. Some companies offer future discounts when customers purchase items during a specific time frame. Each sale represents the activity, while the future discount represents the expense. Companies also decide how many commercials they want to run each period. Each commercial increases the variable advertising expense. As the activity increases, the variable advertising expense also increases.
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