Why Fixed Costs Later Become Variable Costs

Why Fixed Costs Later Become Variable Costs

For some companies, fixed costs become variable costs after some time. Two main reasons are responsible for this phenomenon. Firstly, automatic production increases the cost of equipment investment since the equipment may depreciate or incur repair costs. The second reason that contributes to fixed costs later becoming variable is the classification of labor costs as fixed, yet the labor cost constantly varies throughout a company’s life (Chen et al., 2015).

To understand why fixed costs later become variable costs, consider a classroom not operating at full capacity. Such a class can be functional with just one teacher instructing students. Even if one more student joins the class, there will be no need to add more teachers; hence, the cost of compensating the teachers remains fixed. However, once more students join the class and exceed the classroom capacity, the management will have to hire a new teacher and construct a new classroom. To that end, labor and classroom costs that are typically constant will rise. Such a move indicates that production is a function of economic factors (Chen & Koebel, 2017).

Another reason that contributes to fixed costs later becoming variable is that as production volume and time frame advance, some fixed costs automatically become variable (Dasu, n.d.). Take an example of companies that have on-the-job training programs. In the short run, such companies can train their employees physically. However, as time advances and the company expands, it may have to hire online services to train employees. Also, rent is only fixed in the short term but may eventually reduce or increase once terms are changed. In sum, the classification of variable and fixed costs only holds water in the short run but is bound to change as production volume increases and time advances.

References

Chen, G. G., Weikart, L. A., & Williams, D. W. (2015). Budget tools: financial methods in the public sector. Sage.

Chen, X., & Koebel, B. M. (2017). Fixed Cost, Variable Cost, Markups, and Returns to Scale. Annals of Economics and Statistics, 127, 61. https://doi.org/10.15609/annaeconstat2009.127.0061.

Dasu, K. (n.d.). Cost Structure: Analyzing Fixed and Variable Costs 1. Www.academia.edu. https://www.academia.edu/28620241/Cost_Structure_Analyzing_Fixed_and_Variable_Costs_1.

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Discuss why most fixed costs sooner or later become variable

Why Fixed Costs Later Become Variable Costs