The Income|Outcome^® Contextuary

First make sure you understand the concept behind the terms Fixed Cost and Variable Cost, then ask “What do you mean by that?”

The terms Fixed Costs and Variable Costs look at the behavior of the costs - do the costs vary with Sales Volume?

• Variable Costs are costs that 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 is a Variable Cost.
• Fixed Costs are costs that 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.

Semi-Variable costs do vary with Sales Volume but they do so in ‘steps’.

There are 2 kinds of Semi-Variable Costs:

The first type of Semi-Variable Cost remains constant over a range of production and then steps up a level (also known as stepwise variable). This could be due to adding a new production machine (maintenance costs will increase) or adding a new location to a retail chain (rent will increase).  Depreciation is a kind of Semi-Variable Cost.

The second type of Semi-Variable Cost starts at a base level in a fixed manner, then increases in a variable manner. An example is a power bill, where there is a monthly connection fee and then a variable cost for usage.

Semi-Variable Costs are Operating Expenses. The reporting of these costs will vary by company - some or all of these costs can be:

• included in Cost of Sales
• included in Factory/Site Overheads (a line item between Contribution and Gross Profit)
• included in SG&A.