Classification Of Costs – Fixed and Variable Costs

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

  • Fixed and Variable Costs
  • Direct and Indirect Costs

Costs are generally classified as to whether or not they vary with 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 which do not change based on the quantity of parts being produced.

Variable costs are more directly related to the quantity of product being produced like material and labor costs.  Both material and labor costs are increased with the amount of product being produced.  Other type of variable costs are electricity, consumables like welding supplies, heating and even possibly maintenance tasks that must take place every x parts being produced.

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