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Understand the differences amongst fixed costs, variable costs, relevant costs, and sunk costs

 

There are distinctive attributes that distinguish the differences between fixed costs, variable costs, relative costs, and sunk costs. Here's what you need to know. So don't get mad, get Mad Marketing!

Fixed Costs

Fixed costs are costs incurred by a business regardless of sales. Fixed costs are sometimes referred to as operating costs and consist of, but are not limited to; rent, warehousing facilities, property expenses, internet, and phone bills. These are costs incurred by a business every month, quarter, or year regardless of the performance of the business in terms of revenue generated. These kinds of costs generally fall under committed costs.

The other part of fixed costs are costs that fall under Program costs, which are costs to boost sales. These costs are also known as marketing expenditures which include, advertisements (commercials, billboards, digital marketing), promotional offers/discounts, and sales commissions.

Variable Costs

Variable costs are costs that are expected to fluctuate along with changing business performance. Variable costs are known to include the cost of goods, cost of supplies, shipping, and freight costs, and sometimes sales commission. These are costs incurred by a business depending on its’ performance. If the business is seeing an increase in sales, they will also realize an increase in COG, Sales commissions (if applicable), Shipping and freight costs, and cost of supplies (Including but not limited to packaging supplies, factory workers etc.) On the other hand, if the business is seeing a decline in sales the variable costs will mirror the decline.

Relevant Costs

Relevant Costs consist of expected expenditures from future programs or product launches based on the businesses current decisions. For example, if a business is deciding to launch a new product they are expecting costs from manufacturing, sales commissions (if applicable).

Sunk Costs

Sunk Costs are past costs that should not affect the decision-making process for a business in the present or the future. Sunk costs are made up of previous advertising expenditures and allocation of R&D (Research and Development). Although sunk costs are best left in the past, there are cases of businesses attempting to make this money back by spending more. This is known as the sunk cost fallacy since sunk costs cannot be made back.

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