Variable vs Fixed Costs With Examples

Some of your costs stay the same whether you have a quiet month or your busiest week of the year. Others climb with every sale you make. Knowing which is which is one of the most useful money skills a small business owner can have. This explainer covers variable vs fixed costs with plain examples, a simple way to sort your own expenses and practical ways to use the numbers.

Pen lying on printed financial documents next to banknotes spread across a desk — Sorting your costs into fixed and variable takes one afternoon and sharpens every money decision.

Key takeaways

Fixed costs stay the same as sales change, such as rent, salaries and insurance.
Variable costs rise with each sale, such as materials, card fees and shipping.
Some costs are mixed, with a fixed base plus a variable part, and are worth splitting.
Knowing the split helps you price, budget for slow months and judge whether growth will actually be profitable.

If you have ever wondered why a record sales month did not leave as much money in the bank as you expected, the answer usually sits in your cost structure. Every extra sale brings extra costs with it, while the fixed bills arrive no matter what. Once you can see both clearly, you can make calmer decisions about prices, hiring, discounts and growth.

December is a good moment to do this exercise. You have nearly a full year of numbers, and you are probably thinking about next year's budget anyway. Let's start with the definitions.

What fixed costs are

Fixed costs are expenses that stay the same over a period, regardless of how much you sell. If you sell nothing this month, you still pay them. If you have your best month ever, they do not go up.

Common examples of fixed costs

Rent or lease payments for a shop, office, studio or storage unit.
Salaries for employees on a set wage, including your own if you pay yourself a fixed amount.
Insurance premiums such as liability, property or professional cover.
Software subscriptions billed at a flat monthly or annual rate.
Loan repayments on a fixed schedule.
Equipment leases and depreciation on equipment you own.
Accountant or bookkeeping retainers with a set monthly fee.
Business licenses and memberships renewed each year.

"Fixed" does not mean "forever"

Fixed costs are fixed within a range and a time period. Your rent is fixed until the lease renews. Salaries are fixed until you hire someone new or give a raise. If your sales grow so much that you need a second location or another full-time employee, your fixed costs take a step up. Accountants sometimes call these step costs.

What variable costs are

Variable costs move up and down with your sales or output. Each additional product sold or service delivered adds a bit more cost. If you sell nothing, your variable costs drop close to zero.

Common examples of variable costs

Raw materials and ingredients used to make each product.
Inventory you buy to resell, counted as cost of goods sold when it sells.
Packaging such as boxes, bags, labels and tissue paper.
Shipping and delivery costs per order.
Card processing fees charged as a share of each transaction.
Sales commissions paid per sale.
Platform or marketplace fees charged per order or per listing.
Hourly or freelance labor brought in only when work comes in.

Pro tip

A quick test for any expense: "If I sold twice as much next month, would this cost roughly double, stay the same, or rise a bit?" Doubles means variable. Stays the same means fixed. Rises a bit means it is probably mixed.

Mixed costs: the ones in between

Many real-world expenses do not fit neatly into either box. A mixed cost, also called a semi-variable cost, has a fixed base plus a part that changes with activity.

Utilities: a standing charge plus usage. A bakery's energy bill rises with the number of batches baked.
Phone and internet plans with a base fee plus charges above an allowance.
Staff wages where a core team is salaried but extra hours or shifts are added in busy periods.
Vehicle costs: insurance is fixed, but fuel and wear rise with the miles you drive.
Usage-based software with a base subscription plus charges per user, message or transaction.

To keep things simple, split each mixed cost into its fixed part and its variable part. Look at a quiet month and a busy month. The difference between them, compared with the change in sales, gives you a rough idea of the variable part. The rest is fixed.

Common mistake

Labeling every staff cost as fixed. If you add seasonal shifts, overtime or freelancers whenever orders rise, a chunk of your labor is really variable. Treating it all as fixed can make busy periods look more profitable on paper than they are in the bank.

Pair of scissors cutting through a strip of banknotes laid out on a flat surface — Variable costs trim a slice off every sale, so it pays to know exactly how big that slice is.

Worked examples from three small businesses

Seeing costs sorted in a real setting makes the idea click. Here are three made-up businesses with simplified numbers.

Example 1: a candle maker selling online

Mina sells handmade candles for $30 each. Her fixed costs are a workshop rental of $600 a month, website and email software of $80 a month and insurance of $40 a month, so $720 a month in total. Her variable costs per candle are wax, wick and fragrance at $6, a jar and lid at $3, packaging at $2, shipping supplies at $1 and card fees of about $1, so $13 per candle. Each candle leaves $17 to cover the fixed costs and then add to profit. (These numbers are made up for illustration.)

Example 2: a freelance bookkeeper

Tom works from home. His fixed costs are accounting software, professional membership, insurance and a laptop he depreciates over three years. His variable costs are small: some extra software seats for each new client and occasional travel. Because most of his costs are fixed, every new client adds a lot to his profit, but a lost client hurts just as much. (A made-up example.)

Example 3: a neighborhood cafe

Ana's cafe has rent, salaried managers and equipment leases as fixed costs. Coffee beans, milk, food, cups and card fees are variable. Energy and part-time wages are mixed, because she adds shifts on weekends. Sorting it this way shows her that quiet weekday afternoons still carry the full rent, which is why she starts testing an afternoon offer. (A made-up example.)

A template to sort your own costs

Pull your profit and loss statement or bank export for the last 12 months. List every recurring expense and sort it with this table:

Expense	Monthly average	Type	Fixed part	Variable part	What drives it
Workshop rent	$600 (example)	Fixed	$600	$0	Lease terms
Materials	$1,300 (example)	Variable	$0	$1,300	Units made
Energy	$220 (example)	Mixed	$70	$150	Hours of production

Once every line is sorted, add up the fixed column to get your monthly fixed costs. Then divide the variable totals by the number of units or orders in the same period to estimate your variable cost per unit.

Export your expenses for the past 12 months from your accounting software or bank.
Group similar items so you have a manageable list of 15 to 30 lines.
Label each line fixed, variable or mixed using the doubling test.
Split mixed costs by comparing a quiet month with a busy month.
Total your fixed costs per month.
Calculate variable cost per unit, per order or per billable hour.
Review it twice a year, or whenever prices from suppliers change.

How to use fixed and variable costs in decisions

Sorting costs is only useful if you put the numbers to work. Here are the most practical uses.

Pricing

Your price must cover the variable cost of each sale with room to spare, and the room across all sales must cover your fixed costs. If a discount pushes your price close to the variable cost, each sale adds almost nothing toward rent and salaries. Check this before you run any promotion.

Finding your break-even point

Once you know both numbers, the break-even point in units is fixed costs divided by price minus variable cost per unit. In Mina's example, $720 divided by $17 is about 43 candles a month before she makes a profit. We cover break-even in more depth elsewhere, but this one line shows why the split matters.

Planning for slow months

In a quiet month, variable costs fall with sales, but fixed costs do not. Your total fixed costs are the minimum you need to cover each month. Many owners use that figure to size a cash cushion for the slow start of the year.

Judging growth and investments

A business with mostly fixed costs, like software or consulting, gains a lot from each extra sale once fixed costs are covered, but it carries more risk when sales drop. A business with mostly variable costs, like reselling, is more flexible but earns less on each extra sale. Neither is better. Knowing your mix helps you decide whether taking on a bigger lease or a new hire is worth the added fixed cost.

Pro tip

Before you sign anything that adds a fixed cost, ask how many extra sales you need each month to pay for it. If the answer feels uncomfortable, look for a variable or pay-as-you-go option first, then switch to fixed when the volume is proven.

A short note: this is general information about business costs, not financial or tax advice. How costs are classified for tax purposes may differ from how you track them for management, so check with an accountant for anything related to your returns.

Your cost sorting action plan

Export 12 months of expenses from your books or bank
Label every line as fixed, variable or mixed
Split mixed costs into fixed and variable parts
Total your monthly fixed costs
Work out your variable cost per unit or per order
Check that your prices and planned discounts cover variable costs with room to spare
Use your fixed cost total to plan a cushion for slow months
Set a reminder to review the split in six months

Frequently asked questions

Is my own pay a fixed or variable cost?

If you pay yourself a set amount each month, treat it as a fixed cost for planning. If you only take money when there is profit left over, it behaves more like a share of profit. Many owners find it helpful to plan a fixed baseline amount so the business is tested against a realistic cost.

Is marketing fixed or variable?

It depends on how you spend it. A monthly agency retainer is fixed. Ads that you scale up and down with sales, or affiliate commissions paid per order, are variable. Many businesses have a bit of both.

Are cost of goods sold and variable costs the same thing?

They overlap but are not identical. Cost of goods sold covers the direct cost of the products you sold. Variable costs can also include things outside it, such as card fees, shipping to customers and sales commissions, depending on how your books are set up.

Should I try to turn fixed costs into variable ones?

It can lower your risk, especially when sales are uncertain. Renting equipment by the job, using freelancers or choosing pay-as-you-go tools keeps costs flexible. The trade-off is that variable options often cost more per unit once your volume is high and steady.

The bottom line

Fixed costs are the bills you pay no matter what. Variable costs grow with every sale. Mixed costs have a bit of both. Once you sort your expenses this way, pricing, budgeting and growth decisions become clearer and much less stressful.

Set aside an hour this month, sort last year's expenses with the template above and work out your fixed cost total and variable cost per unit. Those two numbers will guide you through next year far better than a gut feeling.