Identifying fixed and variable costs

It’s all very well being able to recognise the different types of costs by looking at a graph – but how do you identify them in real life, just from looking at the numbers? Actually, it’s fairly straightforward, as the Kaplan tutor explains in this video.

The video includes the following table:

Fixed, variable or semi-variable?

Are these costs fixed, variable or semi-variable? How can we tell?

• If the total of a cost doesn’t change as production levels change, then that cost can immediately be classified as a fixed cost.

But what if the total cost does change with production levels? That suggests it’s going to be either a variable cost or a semi-variable cost – but which?

To find out, calculate the cost per unit at both production levels, then compare the results:

Cost per unit = total cost / number of units produced

• If the cost per unit stays the same despite production levels changing, then it is a variable cost.
• If the cost per unit changes when production levels change, then it is a semi-variable cost.

How much is fixed and how much is variable?

Step 1: Variable cost per unit

Variable cost per unit = extra cost / extra units produced

Step 2: Fixed cost

Total variable cost = variable cost per unit × units produced

Fixed costs = total cost – total variable cost

It’s really important to have a good understanding of costs before we move on, so the next step seems like a good time for a quiz!