Classification Of Costs - Fixed and Variable Costs

There are many facets of costing, and breaking costing into these four categories helps in understanding

• Fixed Costs

• Variable Costs

• Direct Costs

• Indirect Costs

Fixed Costs are generally classified by whether or not they vary based on the quantity of parts being manufactured. Many times, this can be described as a Setup Cost because it does not vary with the quantity of parts being manufactured. In manufacturing, this can be setup costs, travel costs, staging costs, etc. The other type of fixed costs would be rental space, insurance, administrative salaries, etc. (because they do not change based on the quantity of parts being produced).

Variable costs are more directly related to the quantity of product being produced, including material and labor costs. Both material and labor costs increase with the amount of product being produced. Other type of variable costs include electricity, consumables (like welding supplies), heating, and maintenance tasks that must take place every X hours that a machine is running.

The other two are Direct and Indirect Costs, which I will write about in the next blog.