Are Salaries Fixed or Variable Costs?

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Managerial accounting focuses on the tracking of costs associated with a company's production process. Two common coasts in this system are fixed and variable. Fixed costs do not change over time. Variable costs change as a company increases or decreases production output. Fixed salaries are common in many businesses and typically fall under the fixed cost category.

Defined

  • Fixed salaries represent compensation paid to employees that remains stable each month. For example, a production supervisor may earn a $2,500 salary each month. The salary does not change regardless of hours worked by the production supervisor. Accountants allocate the $2,500 as fixed production costs to produced goods.

Types

  • Companies can have direct and indirect salaries paid to employees. Direct fixed cost salaries represent compensation paid to employee that affects production, such as supervisors or managers. Indirect fixed salaries are those that do not affect production. These can include sales staff and quality control supervisors. Companies report these costs differently. The former is part of direct labor and the latter is manufacturing overhead.

Per-Unit Changes

  • Though fixed costs do not change each period, companies can experience per-unit changes. For example, a production process operates in relevant ranges. Relevant ranges mean costs do not change during specific levels of production output. A company may produce between 1,000 and 1,500 widgets where all costs remain the same. Producing 1,500 widgets, however, allows for less fixed salary cost applied to each unit compared to producing 1,000 units.

Considerations

  • Accountants typically post production labor into a factory labor account rather than payroll expense. The labor account indicates a company can allocate this cost to products rather than as a period cost that lowers net income. This is also the preferable reporting process for generally accepted accounting principles.

References

  • "Managerial Accounting: Tools for Business Decision Making"; Jerry Weygandt, et al.; 2010
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