Budget expenses can either remain the same every month or they can fluctuate. Variable expenses are those that can change based on things like weather, cost, demand, or many other variables. Fixed expenses remain the same every month.
A typical household has normal monthly expenses like water, electricity, mortgage, credit card, or other items. Sometimes these costs remain the same every month, like a car payment. A car payment is a fixed amount for a fixed period of time, so it is called a fixed expense. Electricity varies each month, depending on the amount used in the household. So it is called a variable expense.
The length of a budget will also affect what are considered variable expenses. For example, a mortgage might have an adjustable rate of interest, and therefore might go up or down depending on the market interest rate. Usually the first few years of an adjustable rate mortgage, however, are at a fixed interest rate. So if you look at a budget for a year, the mortgage payment may not increase. Over a period of ten years, however, it may.
A business functions in much the same way, with an operating budget of expenses. This budget contains both fixed and variable expenses. In retail stores, where items are bought and then re-sold, variable expenses are not too difficult to anticipate. Usually the price of goods stays relatively stable, and one can attempt to control demand somewhat through marketing and advertising. Items like electricity, however, will still be variable expenses because weather is difficult to anticipate.
Matters are complicated immensely when dealing with variable costs associated with manufacturing. In manufacturing, the number of units manufactured can fluctuate greatly, and each unit has an impact on variable and fixed costs. Up to a certain point, each unit sold goes to pay fixed costs. After that break-even point, each unit has only variable costs associated with it since the overhead, or fixed costs, have already been paid. It is the goal of every manufacturer to exceed the break-even point every month in order to turn a profit.
Marginal costs are different from fixed or variable costs, but they are somewhat related. A marginal cost is the cost of producing just one unit. This cost can vary widely, because the cost of one unit when fixed costs have not been met is much higher than after fixed costs have been met.
