A company’s costs are essential for its operation since, through them, it is possible to make daily decisions and design the appropriate strategies that allow the business to grow.

It becomes more significant when we need cost estimating services for a construction company where numerous costs are included to complete the project successfully.

However, many entrepreneurs still do not have detailed information on fixed and variable costs. In this blog, you will understand how they differ and why they are so important for the development of your business.

The advantages of good cost management in the company

First, it is necessary to clarify that expenses and costs are not the same. Fixed and variable costs are the main costs that a company has when producing goods and services.

For its part, the expense is the set of attributions destined to the distribution or sale of the product and the maintenance of the company’s physical plant.

For example, when we need construction cost estimating services, we want to identify the costs that matter to complete the construction of a residential or commercial project without having trouble arranging the funds.

We can characterize fixed and variable costs in the following way:

  •         It is essential to establish prices since a price cannot be set if there is no information on how much it costs to produce the product.
  •         Be useful to set goals about how much we want to earn from the sale of the product.
  •         Knowing the costs will allow us to analyze what is being spent more on and decide if it is necessary to implement a cost reduction policy.

Here, we want to help you know the balance point, that is, the point where we can cover the costs with the profits generated.

We can divide these costs into two types, which are fixed and variable costs.

Fixed Costs

All those costs are fixed and do not change in a specific period. Here, the production volume does not matter. Mainly, fixed costs do not have any relation to production and sales. These costs do not depend on whether the company sells, and the firm always incurs them. They are measured per unit of time, for example, monthly or annually.

Variable Costs

On the other hand, variable costs are directly related to the volume of production or sale, and everything depends on or is a function of the quantity produced or consumed.

How to compare fixed costs with variable costs?

It is important to be clear about the difference between both types of costs while using cost estimating services since it is common to make mistakes about which are fixed and which are variable.

For example, when we ask what kind of cost is the electricity bill that the office consumes, many would think that it is a variable cost because it is never the same monthly amount.

However, it is essential to understand that a variable cost does not correspond to how much it varies in quantity but rather has a direct relationship or not with the volume of production.

Therefore, the higher the volume, the higher the variable cost; the lower the volume, the lower the variable cost. And a good construction cost estimating services company mentions it in the documents to help business owners understand the difference.

Here are some examples of variable costs:

  •         Raw materials and supplies
  •         Rental of machinery, equipment, and tools for specific jobs,
  •         Freight and fuel
  •         Office supplies
  •         Staff overtime
  •         Repairs and maintenance
  •         Phone calls
  •         Travel expenses
  •         Sales commissions

Some examples of fixed costs are:

  •         Base salaries of contracted personnel
  •         Taxes on movable and immovable property
  •         Benefit plans for staff
  •         Contract cleaning and security services
  •         Insurance
  •         Base charges for utilities, such as electricity, gas, and water
  •         The basic charge for phone service or the basic plan for a cell phone
  •         Cost of Internet connection
  •         Cost of creating and maintaining an eCommerce or website
  •         Licenses and permits
  •         Financial expenses, such as interest

However, the higher the production volume, the diluted fixed costs between each unit produced until they become an irrelevant costs.

In other words, the higher the sales volume, the lower the fixed costs.

Once you have the fixed and variable costs, you can now calculate the company’s total costs.

Total costs are the sum of fixed and variable costs, representing the minimum total monetary expenditure necessary to produce.

Detect the costs of your business

If you are starting a business, a fundamental aspect that you must master backward and forwards is the costs you incur when developing your project.

Total cost is the combination of fixed and variable costs. The former is always the same, no matter how much the company produces or sells. The variables change according to the quantity produced, and differentiating them is key for your business.