This glossary uses Visual Finance™ to bring financial terms to life. Each example shows data from the Round Number Company, a fictional business with simplified figures to make learning easier. For more details, visit 'How to Read Visual Finance'.
The terms Fixed Costs and Variable Costs look at the behavior of the costs - do the costs vary with Sales Volume?
Variable Costs do vary with the Sales Volume. If Sales double from one month to the next, then the Cost of Sales will also double. Cost of Sales (COS) is a Variable Costs.
Fixed Costs do not vary directly with Sales Volume; they are approximately the same from month to month (they are ‘fixed’). Examples include R&D, advertising, non-production personnel, training, and rent for the corporate offices.
Note: Advertising is considered a Fixed Cost. An increase in Advertising might lead to higher sales or it might not. There is no direct relationship - doubling the Advertising spend will not double Sales Volume.
Note: The terms Overhead(s), Operating Expense (OpEx), Indirect Costs, and Fixed Costs are very similar. Check how each term is used in your company.
See also Variable Costs and Semi-Variable Costs.
The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.