In this case, fixed costs are expenses that must be paid every month. These include rent, utilities, phone bills, gasoline for the car, groceries, and so on. Fixed costs do not change very much (if at all) from month to month. These are costs that don’t increase or decrease depending on how much personal spending you do in a month — for instance, if you go on a shopping spree at your favorite clothing store, your rent won’t go up. As an example, let’s say that we need to put together a personal budget to save money. In our case, our fixed costs are: rent = $800, utilities = $250, phone bill = $25, internet bill = $35, gasoline for commuting to work = $200, and groceries = $900. Adding these up, we find that our total fixed costs are $2210.
Variable costs include expenses like shopping trips, nights out, clothing (beyond what you need), vacations, parties, gourmet food, etc. Note that, even though expenses like utility bills can vary slightly from month to month, they aren’t variable costs because they’re not optional. In our example situation, let’s say that our variable costs include: money for theater tickets = $25, weekend vacation = $500, dinner party for a friend’s birthday = $100, and a new pair of shoes = $75. This would bring our total variable costs to $700.
Using the examples of fixed costs and variable costs given above, we would calculate our total cost as follows: $2210 (fixed costs) + $700 (variable costs) = $2910 (total cost).
Using the examples of fixed costs and variable costs given above, we would calculate our total cost as follows: $2210 (fixed costs) + $700 (variable costs) = $2910 (total cost).
Tracking fixed costs is easy — simply keep track of your housing expenses (rent, etc. ) and save every major monthly bill you receive for that month and you’ll have a good deal of the work done. Groceries can be a little messier to keep track of, but if you keep your receipts or monitor your checking account transactions online, it shouldn’t be hard to get an accurate total. Tracking variable costs can be a little more difficult. If you use credit or debit cards to make all of your purchases, you can simply add your expenses at the end of the month by using your online banking profile (nearly all checking accounts and credit card accounts now give you this option for free. ) On the other hand, if you make lots of cash or check purchases, you’ll want to save your receipts or write down the amount of money you spend with each purchase.
Fixed costs for a business are similar to (but not exactly the same as) those for a personal budget. A business’s fixed costs include rent, utilities, building leases, equipment, machinery, insurance premiums, and labor not involved in the production of the goods and services. Fixed costs are the costs that repeat every month. For example, let’s say that we own a basketball factory. Our monthly fixed costs include: building lease = $4,000, insurance premiums = $1,500, loan payments = $3,000, and equipment = $2,500. In addition, we pay $7,000 per month for workers that don’t directly affect the production of our basketballs — janitors, security guards and so on. Adding these up, we get a value for our fixed costs of $18,000.
Variable costs for a business include things like raw materials, shipping expenses, labor that is involved in the production process, and so on. [3] X Research source In addition, utilities can be a variable expense if they fluctuate with the output of your business. For example, since a robotic car factory uses a large amount of electricity and since the amount of electricity needed will increase as more cars are produced, utilities can be classified as a variable cost. In our basketball factory example, let’s say that our variable costs include: rubber = $1,000, shipping = $2,000, factory worker wages = $10,000. In addition, our factory uses a large amount of natural gas for the rubber vulcanization process and this cost increases as production ramps up — this month’s utilities bill was $3,000. Adding up our expenses, we get total variable costs of $16,000.
In our example, since our fixed costs are $18,000 and our variable costs are $16,000, our total monthly cost for the factory is $34,000.
In our example, since our fixed costs are $18,000 and our variable costs are $16,000, our total monthly cost for the factory is $34,000.
In addition, you may want to consult another document called a balance sheet to determine how much money the business needs to pay back in the future. The balance sheet contains (in addition to other important figures) a business’s liabilities — the money it owes to others. This can help you determine your business’s financial health: if you’re just barely making enough money to meet your total cost and you have major liabilities, your business may be in an unfavorable position.
As an example, let’s say that we’ve recently inherited $20,000 from an obscure relative and that, rather than squandering it all on a luxurious vacation, we want to invest half of it in the stock market to get some long-term potential out of it. In this case, we’ll say that we are investing $10,000.
For the purposes of our example, let’s say that our chosen adviser charges $250/hour (not bad — prices can easily range to $500/hour)[6] X Research source . If she agrees that it will take two hours of work to put together our portfolio, her fee will be $500. Let’s say we need to add $100 to this in the form of various minor fees and we get a total of $600.
In our example, let’s say that, on top of her flat fee, our adviser also charges a 1% commission. This is only for example purposes — in the real world, it’s usually either one form of payment or the other, not both. In this case, since 2% of the $10,000 we want to invest is $200, we’ll add this to our total cost. A word of caution: because their pay is determined by how much you buy and sell, some commissioned investment advisers have been known to act unethically, convincing clients to ditch old stocks and buy new ones frequently in an effort to line their own pockets. [8] X Research source Only use the services of advisers that you know and trust. If all else fails, flat fee-paid advisers tend to have less of an incentive for conflicts of interest.
In our example, let’s say that there is a 1% tax on all major investments (in the real world, again, this may or may not be the case where you live. ) In this case, since 1% of $10,000 is $100, we’ll add this to our total cost.
Let’s solve our example problem: Initial investment: $10,000 Fees: $600 Commission: $200 Taxes: $100 Total: $10,900
