Are insurance premiums a fixed cost?

is insurance a variable cost

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. For example, raw materials may cost $0.50 per pound for the first 1,000 pounds. However, orders of greater than 1,000 pounds of raw material are charged $0.48.

This might mean reducing idle time, optimizing the use of raw materials, or improving production workflows. Lean management focuses on eliminating waste in all forms from the production process. Sales commissions, for example, are also considered variable because the size of a commission is tied to the volume of products sold by an employee. To find out more on costs, budgeting, accounting and other core financial knowledge, look at our Finance for the Non-Financial Manager e-learning course.

  1. However, if you pay salespeople a commission or pay contractors with piece-rate earnings, then this will be a variable cost.
  2. Alternatively, advancements in technology or improved procurement strategies might lower the cost per unit, resulting in reduced variable costs.
  3. For example, if no units are produced, there will be no direct labor cost.
  4. All of this means increasing leverage by focusing on overhead costs has the potential to yield large returns for a business.

While a fixed cost remains the same over a relevant range, a variable cost usually changes with every incremental unit produced. Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs. A variable cost is a corporate expense that changes in proportion to how much a company produces or sells. Variable costs increase or decrease depending on a company’s production or sales volume—they rise as production increases and fall as production decreases. Variable costs stand in contrast with fixed costs, since fixed costs do not change directly based on production volume.


And with the OECD predicting US economic growth to be just 0.5% in 2023, many companies will be looking at ways to reduce variable costs and retain additional revenue.[1]OECD. However, even seasoned business owners struggle to classify variable and fixed costs. This guide explores variable costs, how to calculate them, how they impact growth, and a host of related topics. The key difference between variable and fixed costs is flexibility (or variability). While fixed costs remain constant, variable costs change directly with output.

Salaries are a fixed cost, as they don’t change when businesses increase production—but this doesn’t mean all labor costs are fixed. For example, if you pay piece-rate or commission payments, these are variable costs, as they increase alongside output. Due to the nature of fixed costs and variable costs, your business will lose money until it reaches a specific number of units that generate enough revenue to cover all costs.

is insurance a variable cost

Cost is something that can be classified in several ways, depending on its nature. One of the most popular methods is classification according to fixed costs and variable costs. Fixed costs do not change with increases/decreases in units of production volume, while variable costs fluctuate with the volume of units of production.

Cost-Volume-Profit Analysis

These types of expenses are composed of both fixed and variable components. They are fixed up to a certain production level, after which they become variable. It’s easy to separate the two, as fixed costs occur regularly while variable ones change as a result of production output and the overall volume of activity that takes place. However, since variable costs increase proportionally with an increase in production, they can reduce profit margins if a business significantly increases its production. An operation with low variable costs and high fixed costs can achieve large profit margins if its revenue spikes. A company that seeks to increase its profit by decreasing variable costs may need to cut down on fluctuating costs for raw materials, direct labor, and advertising.

Variable costs are directly related to the cost of production of goods or services, while fixed costs do not vary with the level of production. Variable costs are commonly designated as COGS, whereas fixed costs are not usually included in COGS. Fluctuations in sales and production levels can affect variable costs if factors such as sales commissions are included in per-unit production costs. Meanwhile, fixed costs must still be paid even if production slows down significantly.

Complexity in Identifying Cost Types

This happens because the average fixed cost per unit decreases as production rises, leading to expanded profit margins. Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity. The costs increase as the volume of activities increases how to compute overhead variances and decrease as the volume of activities decreases. On the other hand, variable costs show a linear relationship between the volume produced and total variable costs. In general, companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile, as their profits are more dependent on the success of their sales.

If a salesperson makes an additional sale, they receive a commission from your business. The relevant range of raw costs relates to differences in expenses often appearing when you bulk purchase goods. For example, the cost of raw materials may decrease as a business increases its purchase volume. If Amy were to shut down the business, Amy must still pay monthly fixed costs of $1,700. If Amy were to continue operating despite losing money, she would only lose $1,000 per month ($3,000 in revenue – $4,000 in total costs). Therefore, Amy would actually lose more money ($1,700 per month) if she were to discontinue the business altogether.

However, the worker compensation cost of the office staff will be variable with respect to the amount of office staff salaries and wages. A variable cost is any corporate expense that changes along with changes in production volume. As production increases, these costs rise and as production decreases, they fall. Since fixed costs are more challenging to bring down (for example, reducing rent may entail the company moving to a cheaper location), most businesses seek to reduce their variable costs. One of those cost profiles is a variable cost that only increases if the quantity of output also increases.

Consider the variable cost of a project that has been worked on for years. An employee’s hourly wages are a variable cost; however, that employee was promoted last year. The current variable cost will be higher than before; the average variable cost will remain something in between. Raw materials are the direct goods purchased that are eventually turned into a final product.

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