Beginner level · Module 4: Tracking and Controlling Expenses · Lesson 2 of 3
Fixed and Variable Costs
Understand how costs behave as activity changes.
In this lesson you will
- Classify costs as fixed or variable
- Explain why cost behaviour matters for decisions
Key concepts
fixed costsvariable costssemi-variable costscost per unit
The lesson
Fixed costs stay the same whatever the level of activity in the short term: rent, salaried staff, insurance.
Variable costs rise and fall with activity: materials, packaging, sales commissions. Some costs are semi-variable, such as electricity with a fixed charge and a usage charge.
Knowing cost behaviour helps with pricing, budgeting and deciding whether extra sales are worthwhile.
Step by step
- Classify the organisation's costs.
- Identify semi-variable costs.
- Calculate variable cost per unit for one product.
- Discuss implications for pricing.
Practice activity
Classify the three months of expenses as fixed, variable or semi-variable.
Expected result: A classified cost list with variable cost per unit calculated.
Check your understanding
-
Is rent fixed or variable?
Show answer
Fixed.
-
Give an example of a semi-variable cost.
Show answer
Electricity with a fixed charge plus a usage charge.
Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.