While it might seem intuitive to categorize expenses into fixed and variable based on their relationship to the number of units sold, it's more nuanced than that. Here's an explanation as to why neither fixed nor variable expenses may fully capture the relationship to units sold.
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Fixed Expenses: These are costs that do not change with the level of production or sales, at least within a certain range of activity. Examples include rent, salaries of permanent staff, and insurance. Fixed expenses remain constant regardless of how many units are sold.
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Variable Expenses: These are costs that vary directly with the number of units produced or sold, like materials and direct labor costs. They increase as production increases and decrease as production decreases.
However, in practice, not every cost fits neatly into these categories.
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Mixed Expenses: Some costs are mixed or semi-variable; they contain both fixed and variable components. For instance, a utility bill may have a base charge (fixed) plus a variable charge based on usage.
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Step Costs: Other costs may behave like a fixed expense for a certain range of activity but then jump to a higher level as production passes a threshold (for example, hiring additional staff or leasing additional space).
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Behavior Over Time: Expenses might not directly correlate to short-term production changes due to long-term contracts or agreements, which can obscure their nature. For instance, a long-term supplier contract may lock in costs that are technically variable over a shorter term.
Therefore, while it's common to refer to fixed and variable expenses, understanding the complexity and nuances of expenses in a real business context can lead to the conclusion that neither fixed nor variable expenses alone adequately describe how certain costs behave in response to changes in units sold.