fixed, variable, and mixed costs

Imagine your monthly phone bill. Part of it is the flat plan fee you pay no matter what — even in a month you make zero calls. Another part grows with how much you use — extra data, pay-per-minute roaming. The flat fee behaves one way, the usage part behaves another, and together they make your real bill. Business costs behave in exactly these ways as activity (units made, hours worked, customers served) goes up and down.

Precisely, a fixed cost stays the same in total as activity changes — rent of 10,000 a month is 10,000 whether you make 1 unit or 1,000. A variable cost changes in total in proportion to activity — if material is 3 per unit, then 100 units cost 300 and 200 units cost 600. The neat twist is that per-unit behavior is the mirror image: fixed cost per unit falls as you spread the 10,000 over more units (10,000 over 1,000 units is 10 each; over 2,000 units is 5 each), while variable cost per unit stays flat at 3. A mixed cost (also called semivariable) has both pieces at once — like the phone bill: a fixed base plus a variable part. A delivery truck costing 500 of insurance per month plus 0.40 per mile is mixed.

This matters because nearly every planning tool — break-even, budgeting, contribution margin, CVP — first needs each cost split into its fixed and variable behavior. A classic trap is the confusion that fixed costs 'never change': they are fixed only in total and only within the relevant range, and they do change per unit. Likewise 'variable' does not mean uncontrollable; it means it scales with activity. Separating mixed costs into their two parts (often with the high-low method or regression) is one of the first real chores of managerial accounting.