## Types of Costs in Business: Clear Segmentation Needed

To manage a business effectively, you must understand the cost structure deeply because costs are not just floating numbers; they are the foundation of all decision-making, from setting prices, planning production, to evaluating breakeven points.

**Cost types** are divided into two major groups based on behavior—fixed costs and variable costs. Clear differentiation helps you control finances and plan growth wisely.

## Fixed Costs (Fixed Cost) are the stability you pay every month

**Fixed costs** are expenses that a business must pay regardless of whether sales increase or decrease. The amount remains constant, does not diminish, and does not increase with output. Even with no operations, these costs must still be paid.

For this type of cost, think of it as the "basic cost" that must be present for the business to run. No matter how many units are sold, these costs stay the same.

### Characteristics of Fixed Costs

- **Unrelated to volume** - Whether producing a lot or a little, sales are good or bad, this expense remains unchanged.
- **Long-term contractual obligation** - Usually arising from lease agreements, loans, or signed commitments.
- **Must be considered in pricing** - This figure is the initial basis for calculating how much needs to be sold to break even.

### Examples of Fixed Costs in Business Management

**Rent** - Whether for an office, factory, or storage, rent must be paid monthly or annually at the same amount, even if there are no sales that month.

**Employee salaries** - For full-time permanent staff, salaries are fixed and do not depend on sales volume.

**Insurance** - Product insurance, asset insurance, risk insurance must be paid regularly as per the contract.

**Depreciation of equipment** - Machinery, furniture, computers; these costs are calculated annually as fixed amounts.

**Loan interest** - If the business borrows from a bank, interest must be paid monthly according to the contract, regardless of business performance.

## Variable Costs (Variable Cost) fluctuate depending on sales volume

**Variable costs** are the opposite; they change according to the quantity produced or sold. The more you sell, the higher these costs; the less you sell, the lower they are proportionally.

This type of cost offers flexibility—you can adjust it based on market conditions. If demand decreases, you can produce less, thus saving on these costs.

### Characteristics of Variable Costs

- **Increase with production** - Producing more products requires more raw materials and labor, increasing costs proportionally.
- **Flexible** - You can reduce these costs when production or sales decrease.
- **Affects per-unit cost** - Understanding variable costs well helps you calculate the cost per item accurately.

### Common Examples of Variable Costs

**Raw materials** - The main components needed to produce a product; more production means more raw materials.

**Direct labor wages** - Workers paid based on output; more production means higher wages, fewer units mean lower wages.

**Energy and water costs** - Electricity, gas, water; usage increases with industrial activity and decreases when production halts.

**Packaging materials** - Producing 100 units requires 100 boxes; producing 1,000 units requires 1,000 boxes.

**Transportation and delivery costs** - More sales lead to higher shipping costs; fewer sales mean lower costs.

**Commissions** - If the sales team earns a percentage based on sales volume, commissions fluctuate accordingly.

## Clear Comparison - Fixed vs. Variable Costs

| Aspect | Fixed Costs | Variable Costs |
|--------|--------------|----------------|
| **Change with volume** | No, regardless of workload | Yes, change with production/sales volume |
| **Examples** | Rent, salaries, insurance, interest | Raw materials, labor, energy, transportation |
| **Control** | Difficult to reduce or alter | Flexible, adjustable based on conditions |
| **Why important** | Used to find breakeven point and budget | Used to reduce costs and increase profit |

To illustrate: a coffee shop pays 5,000 THB monthly rent. This is a fixed cost—whether selling 100 or 500 cups, the rent remains the same. However, as sales increase, the number of cups, water, and hourly wages for staff also increase—these are variable costs.

## Business decision-making requires understanding both cost types

Understanding **cost types**—fixed and variable—helps in many areas:

### Pricing
Knowing total costs (fixed + variable) allows setting prices that cover all expenses and generate profit.

### Production Planning
If next month’s sales are expected to be low, you can reduce variable costs, but fixed costs must still be paid in full.

### Investment Decisions
If variable labor costs are high, investing in machinery ( increases fixed costs but reduces variable costs) for long-term savings.

### Risk Assessment
Businesses with high fixed costs are riskier because they must pay regardless of sales. Conversely, businesses with high variable costs can scale down expenses when sales decline.

### Finding the Breakeven Point
Calculate how much needs to be sold to cover fixed costs and start making a profit.

## Conclusion: Understanding costs means understanding your business

Costs are not just numbers on financial statements; they are the heartbeat of your business. Recognizing **cost types**—fixed or variable—helps you:

- Set smarter prices
- Plan production efficiently
- Manage finances better
- See profit figures clearly
- Make informed investment decisions

Whether you are a business owner, manager, or investor, distinguishing these cost types is a fundamental step toward sound and sustainable decision-making.