Fixed costs and variable costs: definitions and examples

A fixed cost stays the same in total when your activity goes up or down, such as rent or insurance. A variable cost rises and falls in total with activity, such as materials or delivery fuel. A third kind, a mixed cost, is part fixed and part variable. This page is about how costs behave as activity changes, how to split a mixed cost into its two parts, and how to use that split to predict next month's costs.

Billed publishes this page. The definitions are quoted from OpenStax, Principles of Accounting, Volume 2: Managerial Accounting, chapter 2 (Rice University), opened on October 30, 2026.

How Each Cost Behaves

The behavior is different in total and per unit:

• Fixed costs: OpenStax's section 2.2 says "fixed costs remain fixed in total but can increase or decrease on a per-unit basis." The more you produce or sell, the less fixed cost each unit carries.
• Variable costs: OpenStax says "variable costs remain the same per unit, but change in total relative to the level of activity in the business."
• Total cost: OpenStax's chapter 2 key terms define it as the "sum of all fixed and all variable costs".

Examples, for a small business:

• Examples of fixed costs: rent, insurance, software subscriptions, salaried staff, depreciation on equipment.
• Examples of variable costs: materials, packaging, shipping, payment processing fees, sales commissions, freelancers paid per job.
• Examples of mixed costs: a phone or utility bill with a base charge plus usage, or a vehicle with fixed insurance and fuel that depends on miles driven.

How a cost is classified depends on how you pay it. Wages paid as a monthly salary are fixed; wages paid per piece or per job are variable.

Mixed Costs and Step Costs

OpenStax: "Mixed costs are those that have both a fixed and variable component." It explains why splitting them matters: "typically, in the short run, we can only change variable costs but not most fixed costs."

A mixed cost can be written as one equation, Y = a + bx, "where Y is the total mixed cost, a is the fixed cost, b is the variable cost per unit, and x is the level of activity."

Step costs jump instead of rising smoothly. OpenStax: "Step costs remain constant at a fixed amount over a range of activity." That range is the relevant range: "Within this relevant range, managers can predict revenue or cost levels." Adding a second vehicle or a new hire once the work outgrows the first one is a step up in fixed costs.

Splitting a Mixed Cost: the High-Low Method

OpenStax describes the high-low method as a "technique for separating the fixed and variable cost components of mixed costs". The steps:

1. Pick the months with the highest and lowest activity. OpenStax section 2.3: "We always choose the highest and lowest activity and the costs that correspond with those levels of activity, even if they are not the highest and lowest costs."
2. Variable cost per unit = (cost at high activity − cost at low activity) ÷ (high activity − low activity).
3. Fixed cost = total cost at either point − (variable cost per unit × activity at that point).
4. Predict a future month with Y = a + bx.

OpenStax also notes the method's limit: "it is not the most accurate approach to predicting future costs because it is based on only two pieces of cost data: the highest and the lowest levels of activity." Check the result against your other months before relying on it.

Worked Example: A Courier's Van Costs (sample figures)

The business, months and figures here are a sample, invented for this example.

A sample courier tracks one van's monthly running costs (insurance, lease, fuel and upkeep) against deliveries:

• January: 400 deliveries, $3,000
• February: 500 deliveries, $3,650 (including a one-off repair)
• March: 300 deliveries, $2,700
• April: 600 deliveries, $3,600
• May: 450 deliveries, $3,150
• June: 350 deliveries, $2,850

Step 1: the highest activity is April (600 deliveries, $3,600) and the lowest is March (300, $2,700). February has the highest cost but not the highest activity, so it isn't used.

Step 2: variable cost per delivery = ($3,600 − $2,700) ÷ (600 − 300) = $900 ÷ 300 = $3.00

Step 3: fixed cost per month = $3,600 − ($3.00 × 600) = $3,600 − $1,800 = $1,800. Check with March: $2,700 − ($3.00 × 300) = $1,800.

Step 4: for July, with 550 deliveries expected: $1,800 + ($3.00 × 550) = $1,800 + $1,650 = $3,450

The per-delivery cost shows the behavior:

• At 300 deliveries: $1,800 ÷ 300 = $6.00 fixed per delivery, plus $3.00 variable, so $9.00 a delivery.
• At 600 deliveries: $1,800 ÷ 600 = $3.00 fixed per delivery, plus $3.00 variable, so $6.00 a delivery.

The variable part stays at $3.00. The fixed part per delivery halves when deliveries double. If deliveries grew past what one van can handle, a second van would step the fixed cost up, and the equation would need to be worked out again for the new range.

Using Cost Behavior

• Pricing and break-even: the price minus the variable cost per unit is the contribution margin, what each sale adds toward fixed costs. See what is contribution margin and how to calculate the break-even point.
• Cutting costs: variable costs respond to how you do the work; fixed costs change at renewal or when you change contracts. See how to reduce business overhead and what is overhead cost.
• Costing a product or job: see what is cost accounting.

Where Billed Fits

Billed's expense and receipt tracking page says "Give every expense a category so your spending is already sorted when you file taxes or hand the year to your accountant." It also says "Billed's expense report can group your expenses by category." Expenses sorted by category are a starting point for deciding which costs are fixed, variable or mixed. That classification is your own judgment, using the steps above.

For recording expenses, see what is an expense account.

When This Guide Isn't for You

The high-low method uses two months. If your costs swing a lot from month to month, or you're costing a range of products, ask your accountant about methods that use all your data, such as regression.

Related Guides

• What Is Contribution Margin?
• How to Calculate the Break-Even Point
• How to Reduce Business Overhead
• What Is Cost Accounting?
• What Is Overhead Cost?

Frequently Asked Questions

What is the difference between fixed and variable costs?

A fixed cost stays the same in total as activity changes, so the amount per unit falls as you produce or sell more. A variable cost stays the same per unit, so its total rises and falls with activity.

Can a cost be both fixed and variable?

Yes. A mixed cost has a fixed part and a variable part, such as a utility bill with a base charge plus usage. The high-low method is one way to split it into the two parts.

Is depreciation a fixed or variable cost?

Straight-line depreciation is the same amount each period, so it behaves as a fixed cost. Depreciation based on how much an asset is used rises and falls with that use, so it behaves as a variable cost.

How do you predict next month's costs?

Split each mixed cost into its fixed amount and its variable cost per unit, then add the fixed amount to the variable cost per unit multiplied by next month's expected activity. In the sample on this page, 550 deliveries give $1,800 + ($3.00 × 550) = $3,450.