Expenses can be fixed or variable, with factors such as weather, demand, and cost affecting the latter. Budgets for households and businesses can include both types of expenses, with manufacturing costs being particularly complex. Marginal costs are the cost of producing one unit and can vary depending on whether fixed costs have been covered.
Budget expenses can stay the same each month or they can fluctuate. Variable expenses are those that can change based on factors such as weather, cost, demand, or many other variables. Fixed expenses stay the same every month.
A typical household has normal monthly expenses such as water, electricity, mortgage, credit card, or other items. Sometimes these costs stay the same every month, like a car payment. A car payment is a fixed amount for a fixed period of time, which is why it is called a fixed expense. Electricity varies each month, depending on the amount used in the home. That’s why it’s called variable spending.
The length of a budget will also affect what are considered variable expenses. For example, a mortgage might have an adjustable interest rate and therefore could go up or down depending on the market interest rate. Typically, the first few years of an adjustable rate mortgage, however, have a fixed interest rate. So if you look at a budget for a year, your mortgage payment may not increase. Over a period of ten years, however, it can.
A business works the same way, with an operating expense budget. This budget contains fixed and variable expenses. In retail stores, where items are bought and then resold, variable expenses aren’t too hard to anticipate. Usually, the price of goods remains relatively stable, and one can try to control the demand in some way through marketing and advertising. However, items like electricity will continue to be variable expenses because the weather is hard to anticipate.
Matters are very complicated when it comes to variable costs associated with manufacturing. In manufacturing, the number of units manufactured can fluctuate considerably, with each unit having an impact on variable and fixed costs. Up to a certain point, each unit sold goes to pay fixed costs. After that break-even point, each unit only has variable costs associated with it, since overhead or fixed costs have already been paid for. The goal of each manufacturer is to break even every month to make a profit.
Marginal costs are different from fixed or variable costs, but they are somewhat related. A marginal cost is the cost of producing just one unit. This cost can vary widely, because the cost of a unit when fixed costs have not been covered is much higher than after fixed costs have been covered.
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