Periodic costs vs. variable costs: What entrepreneurs need to understand

Why do some businesses grow quickly while others get stuck? Many people think the problem lies in sales figures, but in reality, the issue starts with a lack of understanding of their own cost structure. Mastering cost management per period and variable costs is the secret code that many executives overlook.

Why Cost Matters

For every business—whether a shop, a factory, or a service company—costs are something you must understand clearly because they mean:

• Setting the right price - Miscalculating costs can lead to pricing that results in losses
• Investment decisions - Knowing which assets to invest more in
• Sustainable profitability - Not just selling, but calculating net profit after all costs

Fixed Costs - Expenses that Come with the Business

Fixed Cost (Fixed Cost) are expenses you pay regardless of how much you sell or produce. Whether you produce 100 units or zero, these costs remain the same.

Key characteristics of fixed costs

Unrelated to production volume - Whether you produce a lot or a little, these costs stay constant. This requires strategies to generate enough sales to cover these expenses.

Impact on financial planning - Because they are fixed, businesses can plan budgets more accurately, but these are expenses that must be paid every month.

Examples of fixed costs in real life

• Rent for workspace - Whether sales are high or low, the landlord still requires monthly payments
• Regular employee salaries - Even during slow periods, wages must be paid
• Business insurance - An annual expense that remains unchanged
• Equipment and building depreciation or initial purchase costs
• Loan interest - If you have bank loans, interest payments are due monthly regardless of income

Variable Costs - Expenses that Depend on Sales

Variable Cost (Variable Cost) are expenses that change depending on how much you sell or produce. Simply put: the more you sell, the higher these costs.

Key characteristics of variable costs

Increase with production volume - If today you produce 1,000 units, variable costs go up; if only 100 units, costs decrease accordingly.

Flexible - You can control these costs by reducing production if you want to save.

Important for pricing - Knowing the variable cost per unit is essential to set a safe selling price.

Examples of variable costs in business

• Raw materials - The more you produce, the more raw materials you need to buy
• Direct labor - The cost of labor per unit produced
• Energy and water - Higher production uses more electricity and water
• Packaging materials - More products require more boxes and packing supplies
• Shipping costs - More products mean higher shipping expenses
• Sales commissions - Higher sales lead to higher commissions

Comparing Fixed and Variable Costs

How to Use Cost Data to Increase Profit

1. Find the Break-even Point (Break-even Point)

Know how many units you need to sell to cover all costs (no profit, no loss)

2. Adjust strategies to reduce costs

• If fixed costs are high, increase sales to break even or find ways to cut these costs
• If variable costs are high, negotiate with suppliers for lower prices or find new suppliers

3. Set fair selling prices

Prices must cover both fixed and variable costs, with a margin for profit

4. Plan investments

Invest in machinery if it helps reduce variable costs (labor) in the long run

Recommendations for Managers

For fixed costs:

• Monitor closely, as they will persist regardless of business performance
• Plan revenue to ensure it covers these expenses

For variable costs:

• Continuously review supplier prices
• Track production efficiency to minimize per-unit costs
• During low sales periods, adjust production levels to save costs

Summary

Understanding fixed costs and variable costs is not just an accounting matter; it’s a survival skill for entrepreneurs. Knowing both helps you:

• Make smarter investment decisions
• Set appropriate product prices
• Know how much to sell to avoid losses
• Manage costs carefully to maximize profit

No matter what stage your business is in, improving your cost management is the first step toward sustainable success.