You’d get $648.33, and could safely assume your average grocery bill might be around $650 per month. There is another type of expense category that’s referred to as “discretionary expenses.” These are “optional” purchases, such as entertainment and restaurants. It’s important to track your spending so you know where your money goes and can plan accordingly. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes.
- A business that has a high proportion of variable expenses can usually generate a profit on a low sales level.
- The best time to plan your fixed and variable monthly expenses is at the beginning of each month.
- If rising credit card interest rates are causing your variable expenses to increase, Tally can help with its line of credit1.
- Fixed expenses, such as rent or mortgage payments, remain constant from month to month.
- In contrast, costs of variable nature are generally more difficult to predict, and there is usually more variance between the forecast and actual results.
This means that variable costs increase as production rises and decrease as production falls. Some of the most common types of variable costs include labor, utility expenses, commissions, and raw materials. Monthly variable expenses can also be reduced by taking advantage of economies of scale, meaning you’ll produce or purchase more units of goods or services at a lower per-unit cost. So, if you ramp up production, the contribution margin will increase because you’ll be paying less per unit.
Variable Cost vs. Fixed Cost: What’s the Difference?
If you’re not tracking variable expenses regularly, it could be very easy to under- or overestimate how much of your budget you should allocate to them. This is something you can easily do with a budgeting app, however, which can minimize the odds of variable expenses sideswiping your spending plan. Other ways of budgeting for unreliable variable expenses could include zero-based budgeting where you assign every dollar from your income toward expenses and savings. You could also follow a pay-yourself-first budgeting approach, where you use money first to fund your goals and then work backwards to come up with money you have left over to deal with expenses. Or you could rely on the good old envelope budgeting method, creating different envelopes for income and expenses.
The term sunk cost refers to money that has already been spent and can’t be recovered. While sunk costs may be considered fixed costs, not all fixed costs are considered sunk. For instance, a fixed cost isn’t sunk if a piece of machinery that a company purchases can be sold to someone else for the original purchase price. For example, let’s say that Company ABC has a lease of $10,000 a month on its production facility and produces 1,000 mugs per month.
Utility Payments
As you look at your upcoming bills, you should already know exactly what you’ll pay for fixed expenses. For example, fixed-rate mortgages are among the most common ways to buy a home because the monthly payment remains the same for the entire life of the loan. Fixed expenses are helpful for budgeting because they take the guesswork out of the budgeting process.
Variable Cost Per Unit Formula
Fixed expenses are a known entity, so they must be more exactly planned than variable expenses. After you’ve budgeted for fixed expenses, then you know the amount of money you have left over for the spending period. If you have plenty of money left, then you can allow for more liberal variable expense spending, and vice versa when fixed expenses take up more of your budget. This is where financial software that helps you manage your budget can help you out.
Variable expenses fluctuate from month to month, often increasing as the sale volume or output increases, while fixed expenses such as rent or loan payments stay the same each month. Some examples of variable expenses include utilities, fuel, and inventory costs. You can save money on variable expenses by taking advantage of economies of scale, automating your business processes, streamlining your workflows, and using aftermarket consumables. Fixed costs remain the same regardless of whether goods or services are produced or not. As such, a company’s fixed costs don’t vary with the volume of production and are indirect, meaning they generally don’t apply to the production process—unlike variable costs. The most common examples of fixed costs include lease and rent payments, property tax, certain salaries, insurance, depreciation, and interest payments.
Examples of Variable Expenses
With proper planning, even very volatile expenses won’t have to derail your business plans. Your personal finances are not the only place you may encounter variable expenses. In a small business, a variable cost is an expense that changes according to production or, in some businesses, with changing weather conditions. Trimming variable expenses is more difficult than cutting discretionary spending.
The break-even point refers to the minimum output level in order for a company’s sales to be equal to its total costs. Liliana Hall is an editor for CNET Money covering banking, credit cards and mortgages. Previously, she wrote about personal credit for Bankrate and CreditCards.com.
In economies of scale, variable costs as a percentage of overall cost per unit decrease as the scale of production ramps up. Variable expenses are costs that fluctuate directly to changes in production or sales. These costs increase as a company produces and sells more goods or services and decrease when production or sales decline. Variable expenses commonly include materials, labor, and direct overhead for producing goods or services. If rising credit card interest rates are causing your variable expenses to increase, Tally can help with its line of credit1.
If it produces 10,000 mugs a month, the fixed cost of the lease goes down to the tune of $1 per mug. Variable expenses can quickly lead to more debt if you don’t budget for them. A surprise bill or a holiday season that’s more expensive than expected could easily break your budget and cause you to reach for a credit card. If you know you have a $600 expense for car insurance every six months, setting aside $100 each month will ensure you’ve saved up for that bill. Restaurant meals, charitable giving and travel are all examples of variable expenses that are generally completely optional.
For example, groceries are a non-discretionary expense, but the type of food purchased can be a discretionary expense. 1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.9% – 25.9% per year and will be based on your credit history. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.
The Difference Between Your Credit Card Closing Date and Due Date
As your level of production or consumption increases, the packaging cost increases as well, including both the cost of packing material as well as consumables. When you throw variable expenses into a monthly budget, it’s easy to get confused. Unlike fixed expenses, you must estimate your variable monthly costs and adjust on the fly if they rise significantly. Unlike fixed costs, these types of costs fluctuate depending on the production output (i.e. the volume) in a given period.
How Variable Expenses Affect Your Budget
Most families, for example, spend variable amounts of money on groceries each month. In addition, you’re likely to spend different amounts each month on putting gasoline in your car and paying for necessary car repairs and maintenance. Commissions are often a percentage outsourced accounting and bookkeeping of a sales proceeds that is awarded to a company as additional compensation. Because commissions rise and fall in line with whatever underlying qualification the salesperson must hit, the expense varies (i.e. is variable) with different activity levels.
Fixed expenses include things like your mortgage payments, cell phone bill, loan payments, or car payment—regular budget items that are generally the same amount each month. With fixed costs, you know the total cost, you know the due date, and adding both to your budget is easy peasy. If companies ramp up production to meet demand, their variable costs will increase as well. If these costs increase at a rate that exceeds the profits generated from new units produced, it may not make sense to expand. A company in such a case will need to evaluate why it cannot achieve economies of scale.
