Broadly, operating costs fall into fixed and variable categories, determined by the form they take from period to period. Fixed costs remain the same no matter what goes on at a company, while variable costs fluctuate in response to use and other activities. Accounting for both is necessary to keep accurate records and develop appropriate budgets. Some tools for estimating variable costs are available to help control them, as they can become a problem when a business fails to account for them.
A business’s fixed operating costs remain stagnant no matter how long it is open and how much it produces. These costs include things like rent or mortgage payments, insurance, fees to retain legal counsel, and so forth. They are regular, recurring expenses that do not fluctuate, except by arrangement. For example, an insurance company may increase the price of a policy when it renews. From month to month, however, the premiums would remain the same.
In contrast, variable operating costs fluctuate. Utilities like water and electricity are metered to provide use-based charges. When companies use more, they pay more, sometimes substantially more if they go over baseline usage estimates. Supplies and employee payroll can also be variable. If a restaurant is open for dinner seven nights a week, for instance, it will need more food than if it is closed three of those nights. Likewise, more employees would be needed for peak business periods and extended hours, and hours could be cut at other times to lower payroll expenses.
Within fixed and variable operating costs, businesses may be able to treat costs under a variety of tax categories. Some are expenses directly related to business improvement, like leases on equipment and structures, which may be tax deductible. Likewise, professional fees from attorneys and accountants would fit in their own tax category to allow the company to deduct them. If a cost can be directly linked to the expense of doing business, it may be eligible for special tax treatment.
Fixed costs include premiums, rents, leases, and fees, while variable operating costs may involve activities like capital expenditures, payroll, and supplies. Companies that need to budget for their variable expenses can use tools like estimates from utility agencies, and charting from year to year. These charts can provide rough information about how much a company might expend to spend, given past experiences. For example, payroll for employees during the holiday season might be predictable on the basis of last season’s expenditures, with an adjustment for raises.