Fixed vs Variable Costs: A Plain-English Guide With Examples

Every business cost falls into one of two groups: costs that stay the same whatever you sell, and costs that move up and down with each sale. Knowing which is which is the foundation for pricing, break-even analysis, and budgeting. It also tells you how much risk you carry in a slow month.

This guide explains fixed and variable costs, shows how to sort your own expenses, and walks through an illustrative example for a lawn care business.

What Are Fixed Costs?

Fixed costs stay roughly the same each month no matter how much you sell. You pay them even in a month with zero sales.

Common examples:

• Rent or storage space
• Insurance
• Software subscriptions
• Loan and vehicle payments
• Salaried staff
• Your own base pay
• Accounting fees
• Website hosting

“Fixed” doesn’t mean forever. Rent goes up at renewal and you can cancel software. It means the cost doesn’t change with your sales volume in the short term.

What Are Variable Costs?

Variable costs rise and fall with each unit you sell, whether that unit is a product, a job, or an hour.

Common examples:

• Materials and inventory
• Packaging and shipping
• Card processing fees
• Sales commissions
• Fuel per job
• Hourly or per-job labor
• Disposal or dump fees

If you sell nothing, your variable costs are close to zero.

Semi-Variable Costs

Some costs are a bit of both. A phone plan with a flat fee plus overage charges, a utility bill with a base charge plus usage, or a worker on a base wage plus overtime. The cleanest approach is to split them: put the base amount in fixed costs and the usage part in variable costs.

Worked Example: A Lawn Care Business

A one-truck lawn care business charges $55 per standard mow.

Monthly fixed costs (illustrative):

Fixed cost	Monthly amount
Truck and trailer payment	$650
Insurance	$180
Scheduling software and phone	$110
Equipment storage	$200
Owner’s base pay	$3,000
Total	$4,140

Variable costs per mow (illustrative):

Variable cost	Per mow
Fuel (truck and mower)	$6
Helper’s wages for the job	$14
Blades, string, and maintenance	$3
Card fee	$2
Total	$25

Each mow brings in $55 and costs $25 in variable costs, leaving $30 to put toward fixed costs. That $30 is the contribution margin. Break-even = $4,140 ÷ $30 = 138 mows a month, or about 32 a week. The break-even analysis example walks through this method step by step.

Why the Split Matters

It shows your risk. A business with high fixed costs needs a steady volume of sales just to stand still. If the lawn care owner signs a lease on a $1,000-a-month shop, break-even jumps by 34 mows a month. High fixed costs magnify both good and bad months.

It guides pricing. Your price must at least cover variable costs. Anything below that loses money on every sale, no matter how many you sell.

It helps you plan for slow seasons. In winter, the mowing stops but the truck payment and insurance don’t. Your fixed costs are the minimum you need to cover from savings. The guide to how much to keep in an emergency fund uses the same idea.

It makes budgets realistic. When you create a budget, fixed costs are easy to predict. Variable costs should be budgeted as a percentage of expected sales.

How to Sort Your Own Costs

1. Pull the last three months of bank and card statements.
2. List every recurring expense.
3. Ask of each one: “If I made twice as many sales next month, would this go up?” If yes, it’s variable. If no, it’s fixed.
4. Split anything that’s partly both.
5. Convert annual and quarterly bills into monthly amounts.
6. Work out variable cost per unit by dividing each variable total by the number of jobs or products sold.

Two more posts build on this: overhead rate shows how to measure your fixed costs against sales, and OPEX (operating expenses) explains how these costs show up on your books.

Frequently Asked Questions