Fixed and variable costs of the firm: why classify them?

Among good business management practices is the classification of fixed and variable costs.

In this article, we will discuss the characteristics that define the costs incurred by businesses and why it is essential for businesses that want to monitor cash flow trends and plan targeted growth actions to classify costs.

Fixed costs and variable costs: how to recognize them?

Let's start with some simple definitions.

I fixed costs, also known as structure costs, are invariable figures.
This means that regardless of changes in the quantities produced or sold by a company,
fixed costs remain constant in the medium to long run.

So whether you produce 0 or 100 units of your product or service, the amount of this type of cost never changes.
Basically, whatever the production volume of your business is, those are the costs that, once incurred, will enable you to keep the entire facility operating.

For example, they are fixed costs: 

  • The rental of commercial space;
  • accountant's fee;
  • the installment of management software.


The value of variable costs, on the other hand, changes as the quantities produced or sold increase or decrease. Thus, if your company produced zero units, variable costs would be zero.

The ideal example of variable cost is that which relates to the raw materials needed for production.
You then add:

  • The cost of direct labor;
  • The cost of goods purchased for sale.

How to consider variable costs in the analysis

Once the variable costs have been identified, how is the analysis of the data obtained carried out?

Unit variable costs, i.e., those referring to the individual unit of product, tend to remain constant: in fact, as the quantity of products produced increases, it is the total variable costs that will increase and not those referring to the production of the individual. For this reason, for the purposes of analysis, it is useful to consider the overall variable costs.

Variable costs, however, do not always increase in proportion to production: this is the case with the regressive variable costs.

These can decrease the unit cost of a product when, for example, the company obtains discounts by purchasing large quantities of raw materials from a supplier.

On the other hand, there are variable costs that increase more than proportionally to production: this is the case of so-called progressive variable costs which refer, for example, to overtime work-which results in higher pay for employees outside regular hours.

To simplify, progressive and regressive costs are often treated as if they were linear variable costs. However, if these costs are prevalent in the company, our advice is to avoid rough estimates that could significantly affect the final results.

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Discover the tool that helps you monitor business costs!

The categorization of costs into fixed and variable and their monitoring will enable you to plan and forecast available liquidity, which is essential both for business growth and for resolving any moments of crisis.

In particular, this breakdown of costs will be instrumental in defining of the so-called Break Even Point (insert LINK article BEP) which occurs when the revenues generated manage to completely cover the costs incurred.

Relying on Sibill for cash flow management will enable you to have a detailed, complete and timely view of your cash flow at all times, to monitor income and expenses of all your current accounts from a single screen and to categorize income and expenses according to your rules, in just a few clicks.

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  • Set up some notifications to remember all the payments to be made.


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