Breaking Down Fixed and Variable Cost
What Are the Variable and Fixed Costs in a Restaurant Operation?
Fixed costs are described as any expense that doesn't change regardless of the production level or sales volume. Variable costs will shift based on a response to supply and demand.
Understanding these costs and how they have a direct effect on a restaurant's financial statement and is important for restaurant owners to understand. The following are costs examples for variable or fixed costs.
The designated space for the physical address of the restaurant will be a major fixed cost. Whether buying or leasing, the related fixed costs have other attachments to it for occupancy costs, including taxes and insurance.
Rent for the space could be considered variable due to its fluctuating nature. However, restaurant owners have a guaranteed option on pricing for a certain time frame that is fixed before any changes are made.
Utilities that come with the space maintain their consistency and so are considered fixed costs. This includes water, phone and Internet expenses. Electricity or gas can fluctuate based on demand during certain seasons, or price hikes based on global issues.
Routine maintenance costs for appliances and equipment remain fixed month-to-month. Unexpected charges for breaks and replacements are exceptions to this. Upfront costs for these items can be substantial, but planning for such expenses in advance will keep profit margins in a healthy range.
Food and Beverage
Food and beverage are the most impactful costs restaurants will endure through the duration of business. Cost of goods sold (COGS) are variable costs.
When the cost of food fluctuates at the distributor level it can affect the restaurant's profit margin. Successful restaurant managers will be able to balance supply and demand to keep food waste from impeding profits.
Labor costs are another high expense when running a restaurant business. Staffing expenses can be controlled to a degree, but are still considered variable costs. Larger restaurants will have more varying capability than smaller venues.
During certain times of the year the staffing expenses can vary a lot, such as during holidays. Staff wages and overtime hours fall under the variable cost category. However, a manager's salary would be considered fixed cost.
What is Fixed Cost vs Variable Cost?
Fixed vs variable cost means which category the business expenses fall into when shifts are made to supply and demand. Fixed costs are static and remain at a consistent price for a period of time. Variable costs are fluid expenses which can change as a result of business volume.
What is Variable and Fixed Cost in Accounting?
Fixed costs are expenses that remain unchanged within a certain time period. These costs are predetermined and don't vary regardless of how the business is doing in terms of sales.
A business owner will have fixed costs regardless of any business activity. Expenses like rent and utilities will remain fixed monthly which makes them easier to account for on a financial statement. Fixed costs aren't as easy to control as variable costs but they are easier to budget for.
Variable costs change based on business activity. Since they vary consistently, variable expenses are more difficult to control and budget for. The amount spent monthly can increase or decrease rapidly causing profit margins to fluctuate.
Examples of Fixed Costs
Fixed costs remain static during a certain period of time. Such costs are time-related like monthly salaries. Another example would be a monthly rent payment. Rent is a fixed cost which a small business owner establishes with the landlord at a predetermined rate for a predetermined time.
It should be noted that fixed costs don't remain constant for the long-term. Rent can be increased by a landlord based on a number of reasons. However, the rent will remain fixed until the lease agreement ends.
Some examples of fixed costs include-
- Employee Salaries
- Loan Payments
- Telephone and internet costs
A businesses total variable cost can be calculated by multiplying quantity of output by variable cost per unit. Variable expenses can be controlled to manage profits.
Most variable costs are expenses for operations that vary based on the needs of business activity. During the initial phases of a growing business, operating costs may increase. However, as business increases those start-up costs will level off.
Some examples of variable costs include-
- Direct labor
- Operational expenses
Examples of Fixed and Variable Cost: Some examples of fixed costs include-
Some examples of variable costs include-
Conclusion to Fixed vs Variable Costs
- Fixed and variable costs are important to restaurant owners as they have a direct impact on the monthly budget.
- Fixed costs are predetermined expenses that remain static for a period of time.
- Variable costs fluctuate based on the needs of the business.
- Knowing the difference between fixed and variable costs in the restaurant industry helps you run your business much more smoothly.