Saturday, February 13, 2010

Fixed and variable costs

One of the keys concepts in managing a business is the understanding of fixed and variable costs and how they can be used in practical applications. This article will define the terms using specific examples from the hotel industry.
The basis for each example is a hotel with 100 rooms.

Variable Cost

Variable costs are the total expense changes as volume changes. Room supplies are a common variable cost. The supplies are directly related to the number of rooms that are filled.
If there are 50 guests, they will use 50 soaps (one would hope). If there are 60, then 60 soaps would be used.

Fixed Cost

Costs are identified as fixed if they do not change as volume changes. For instance, a late night registration desk would be attended by one person, whether there was one guest or one hundred.


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