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||____Business Liability Insurance|
|____Travel for Offsite Direct Laborers
||____Fuel Tax for Off Road Use|
|____Office Staff - Hourly Paid
||____Office Staff - Salary Paid|
||____Salespersons - Base Salary|
|____Freight to Ship Product
||____Raw Materials |
Instructions: Put a "V" or "F" for each. After you've completed, press the "Read More."
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| F Rent
|| F Business Liability Insurance|
| V Travel for Offsite Direct Laborers
|| V Fuel Tax for Off Road Use|
| V Office Staff - Hourly Paid
|| F Office Staff - Salary Paid|
| V Water Bill
|| F Salespersons - Base Salary|
| V Freight to Ship Product
|| V Raw Materials |
How did you do on the above?
This discussion helps you decide which expenses are variable and which are fixed expense. First, let's understand what a variable expense is in the context of the business order. A variable expense is one that, like its name suggest, changes. More importantly, it is a cost to the company that is directly related to the selling of the product or service. Often, the question is, "Telephone expenses increase as we close in on a deal. It is also a bill that fluctuates from month to month." However, can you with all certainty take the telephone bill and look at all of those calls and say, "These 10 calls are for this client." or "These 10 calls are for this product." We know that this cannot possibly happen. Therefore, a telephone bill is considered a business expense that is not variable.
People often make it confusing, don't they? Let's simplify things, and say that what we're really discussing is direct vs. indirect costs. Direct costs refer to product creation, selling - commission only, and service provided. We know that if we sold one car, there was a commission paid for it. We know that if we produced 10 widgets, there were $X in raw materials and direct labor to run the machine that turned the raw material into widgets. Therefore, to summarize, variable costs refer to cost of goods (or services) sold. All other costs, by default, are fixed.
A webinar that will help your company understand the importance of emphasizing the differences between the costs is Pricing for Profits.