Fixed vs. Variable Costs: Key Differences and Examples

By Markets & Investing DeskUpdated Nov 10, 2026

Key takeaways

Total variable cost rises with output, but variable cost per unit stays the same at every volume.
Fixed cost per unit falls as output grows, from $10 to $1 per mug when production rises from 1,000 to 10,000.
Break-even units equal total fixed costs divided by contribution margin, which is price minus variable cost per unit.
Mixed costs such as base salary plus commission combine a fixed base with a portion that grows with output.

Fixed costs stay the same over a set period no matter how much a business produces or sells. Rent, insurance and salaried staff are typical examples. Variable costs rise and fall with output: raw materials, packaging, shipping and sales commissions grow when volume grows and shrink toward zero when production stops. The difference is not about how large a cost is or how often it is billed. It is about whether the total changes when activity changes.

How the two costs behave as output changes

Take a hypothetical mug maker that spends $2 in clay, glaze and packaging on each mug and pays $10,000 a month to lease its kiln and workshop.

Mugs produced per month	Variable cost ($2 each)	Fixed cost	Total cost	Fixed cost per mug
0	$0	$10,000	$10,000	n/a
1,000	$2,000	$10,000	$12,000	$10.00
10,000	$20,000	$10,000	$30,000	$1.00

Two patterns show up. In total, the variable cost moves with volume while the fixed cost does not. Per unit, it is the reverse: the variable cost stays at $2 per mug at every level, while the fixed cost per mug drops from $10 to $1 as the same lease is spread across more output.

The formulas behind the table:

Total variable cost = quantity produced × variable cost per unit
Total cost = total fixed costs + total variable cost
Average fixed cost = total fixed costs ÷ quantity produced

Common examples of fixed and variable costs

Typical fixed costs

Lease and rent payments
Property tax
Insurance premiums
Salaries for staff paid regardless of volume (administration, management)
Depreciation on equipment and buildings
Interest payments on debt
Software subscriptions and licenses billed at a flat rate

Typical variable costs

Raw materials and components
Packaging (for a food business, containers and wrappers used per order are variable)
Sales commissions paid per sale
Shipping and delivery charges per order
Hourly or piece-rate production labor
Payment processing fees charged per transaction
Utilities consumed by production equipment

Fixed costs are often described as indirect because they do not attach to any single unit, while variable costs are usually tied directly to making or delivering the product. That is a tendency, not a rule. A machine lease is fixed, yet the machine is used directly in production.

Why the distinction matters: break-even and risk

The split between fixed and variable costs determines how many units a business must sell before it earns a profit. The standard break-even formula is:

Break-even units = total fixed costs ÷ (price per unit − variable cost per unit)

The denominator is the contribution margin: what each sale contributes toward fixed costs after paying its own variable costs. If our hypothetical mug maker sells mugs at $5, each one contributes $3. Covering $10,000 of fixed costs takes 3,334 mugs a month (10,000 ÷ 3 is 3,333.3, rounded up to a whole mug). Every mug beyond that adds $3 of operating profit, assuming price and unit cost stay constant.

This leads to the main trade-off in cost structure:

High fixed, low variable costs (a software company, a hotel, an airline) mean a high break-even point but strong profit growth once volume passes it. A drop in sales hurts quickly, because the fixed bills keep arriving. This sensitivity is called operating leverage.
Low fixed, high variable costs (a reseller, a business that outsources production) mean a lower break-even point and less damage when sales fall, but thinner gains per extra unit when sales rise.

Neither structure is better in general. Fixed costs are cheaper per unit at high, steady volume. Variable costs are safer when demand is uncertain. The effect on earnings shows up in the gap between revenue and profit. The cost structure also shapes how analysts project margins in a business valuation.

Exceptions that change the classification

Semi-variable (mixed) costs

Many expenses have both a fixed and a variable component. These are called semi-variable, semi-fixed or mixed costs. A phone or utility bill with a flat monthly service charge plus usage fees is a common case, as is a salesperson paid a base salary plus commission. Some costs are fixed up to a capacity level and then step up: one supervisor can oversee a certain number of workers, and a second shift requires another.

To analyze a mixed cost, separate the base amount the business pays at zero activity (the fixed part) from the amount that grows with output (the variable part).

Utilities, labor and storage depend on how they are billed

The same type of expense can land on either side:

Utilities: electricity running production machines is largely variable. Heating and lighting an office is closer to fixed. Most utility bills are mixed.
Labor: hourly or piece-rate production workers are variable if hours are cut when output falls. Salaried employees are fixed over the contract period.
Storage and handling: a leased warehouse is fixed. Third-party storage billed per pallet or per order is variable.

The time horizon

Fixed costs are fixed only within a period, often a month, a year or the length of a contract. A lease can be renegotiated at renewal, a facility can be closed and salaried roles can be cut. Over the long run, economists treat all costs as variable. When a business discontinues an underperforming product line, the costs it stops incurring are called avoidable costs.

Marginal cost is the extra cost of producing one more unit or serving one more customer. It is also called incremental cost. Marginal cost is driven mainly by variable costs, since fixed costs by definition do not change with one additional unit. The two are not identical, though: marginal cost can jump when an extra unit requires new capacity, such as another machine or shift.

Sunk costs are money already spent that cannot be recovered. Some fixed costs are sunk, but not all. If a company buys a machine it could resell for close to its purchase price, that spending is not sunk. Sunk costs should not drive future decisions, while ongoing fixed costs still matter for every forward-looking budget.

Product cost vs. variable cost: product costs in accounting include all costs of manufacturing, including fixed factory overhead allocated to each unit. Variable cost includes only the portion that changes with output.

Cash timing is a separate matter from cost behavior. A fixed annual insurance premium may be paid in one lump sum, while depreciation is a fixed cost with no cash outflow at all. The cash flow statement shows those timing differences.

FAQs

Are fixed costs always the same amount every month?

No. A fixed cost does not change with output, but it can change for other reasons, such as a rent increase at lease renewal, a new insurance premium or a raise for salaried staff. It is still fixed because production volume did not cause the change.

What are fixed and variable costs for a bank?

For a bank, branch leases, core banking systems, salaried staff and depreciation behave as fixed costs. Costs that rise with activity, such as interest paid on deposits, transaction processing and card network fees, behave as variable costs.

The Bottom Line

Business owners and managers who set prices, plan budgets or forecast profit need to know which costs move with volume. A high fixed cost structure pays off at steady, high sales but hurts quickly when sales drop, while a variable structure lowers break-even risk at the price of thinner gains. Classify each cost by how it is billed and over what period, since fixed costs stay fixed only until a contract or lease ends.