Fixed and variable costs: examples, and how to split your own

Short answer: fixed costs stay about the same whatever you sell in a month: rent, permanent wages, insurance, software, equipment leases, loan repayments. Variable costs go up and down with sales: materials and stock, packaging, card fees, sales commission, freight, subcontractors paid per job. Splitting your costs this way tells you three things the Profit and Loss does not show directly: how much of every extra dollar of sales you keep (the contribution margin), the sales you need just to cover your costs (break-even), and how hard a quiet month will hit your profit.

Examples of fixed and variable costs

Usually fixed	Usually variable	Mixed (part of each)
Rent and outgoings	Materials, stock and ingredients	Electricity and gas
Salaried and permanent staff wages	Packaging and freight	Casual and part-time wages
Insurance	Card and payment fees	Phone and internet
Accounting and software subscriptions	Sales commission	Vehicle running costs
Equipment and vehicle leases	Subcontractors paid per job	Marketing
Loan repayments and interest	Delivery platform commission	Repairs and maintenance

“Fixed” means fixed in the short term and within a range. Rent is fixed until the lease renews; wages are fixed until you hire or cut hours; a second oven or a second van makes fixed costs jump. The test for any line is simple: if sales fell by a fifth next month, would this cost fall too? If yes, it is variable. If no, it is fixed. If some of it would, it is mixed: split it with a reasonable guess (for example, the base electricity bill as fixed and the extra in busy months as variable) rather than chasing precision.

A worked example: a bakery in Fremantle

These figures are made up and exclude GST. Sam runs a bakery in Fremantle, WA. Last year’s Profit and Loss, with each cost marked fixed or variable:

Line	Amount	Type
Sales	480,000
Ingredients	144,000	Variable (30% of sales)
Packaging	9,600	Variable (2% of sales)
Card fees	7,200	Variable (1.5% of sales)
Total variable costs	160,800	33.5% of sales
Wages (permanent staff)	168,000	Fixed
Rent	60,000	Fixed
Electricity and gas	14,400	Fixed (ovens run every day whatever the sales)
Equipment lease	9,600	Fixed
Software and accounting	7,200	Fixed
Insurance	4,800	Fixed
Total fixed costs	264,000
Net profit	55,200

What the split tells him

1. He keeps 66.5 cents of every extra dollar of sales. Variable costs are 33.5% of sales, so the contribution margin is 100% − 33.5% = 66.5%. Last year sales contributed $319,200 towards the $264,000 of fixed costs, leaving the $55,200 profit.
2. Break-even is about $397,000 a year. Fixed costs divided by the contribution margin: $264,000 ÷ 0.665 = $396,992, about $33,100 a month. Below that he loses money; above it, two-thirds of each sale is profit. The break-even calculator does this sum from your own numbers, and the overhead rate calculator shows what the fixed costs add to every hour you bill.
3. His margin of safety is 17.3%. Sales could fall by $83,008 (480,000 − 396,992), or 17.3%, before the bakery stops making a profit.
4. A 10% drop in sales cuts profit by 58%. At $432,000 of sales, variable costs fall to $144,720 but fixed costs stay at $264,000, so profit is 432,000 − 144,720 − 264,000 = $23,280. Sales fell $48,000; profit fell $31,920, or 57.8%. This is why businesses with high fixed costs feel a quiet month so sharply, and why a good month adds so much: it works the same way upwards.
5. Every fixed cost has a sales price tag. If the landlord adds $6,000 a year to the rent, Sam needs 6,000 ÷ 0.665 = about $9,000 more sales a year just to stand still. Before signing a new lease, hiring or adding a subscription, divide the yearly cost by your contribution margin: that is the extra sales it has to bring in.

The same split shows the levers. A 5% price rise on the same volume adds $24,000 of sales with no extra variable cost, all of it profit, which the price increase calculator tests against losing some customers. Cutting ingredient waste lifts the contribution margin and lowers break-even at the same time.

Why the split matters for cash, not just profit

Fixed costs are the bills that keep arriving when sales stop, which makes them the right measure for a cash buffer: most guides suggest three to six months of fixed costs in cash (see how many months of cash a business should have). Remember that loan repayments are a fixed cash cost even though only the interest appears on the Profit and Loss, and that depreciation is the opposite: it is on the Profit and Loss but is not a cash cost each month.

How to split your costs in Xero

Xero does not label accounts fixed or variable, so you mark them yourself once:

1. Run the Profit and Loss for the last 12 months as one column (Accounting › Reports › Profit and Loss, date range set to the last full 12 months). A full year evens out seasonal swings and annual bills like insurance.
2. Start from the layout Xero already gives you. Accounts under Cost of Sales (purchases, materials, freight in, subcontractors) are usually variable, and that is what gross profit is based on. Most Operating Expenses are fixed, but check for exceptions: card fees, sales commission, packaging and delivery commission are usually coded to expenses and are variable.
3. Mark each account in a spreadsheet (export the report to Excel or Google Sheets), add up the two groups, and divide total variable costs by sales to get the variable cost percentage.
4. Optional: group them in Xero. The Profit and Loss layout editor lets you add your own groups and totals, so you can save a version with “Variable costs” and “Fixed costs” sections and re-run it each month. See Xero custom reports.
5. Check it monthly with the P&L by month. Variable costs should move with sales and fixed costs should stay flat. A “fixed” line that creeps up every month, or a variable cost growing faster than sales, is worth a look; the common-size Profit and Loss shows each cost as a share of sales so this jumps out.

Menu names move between Xero releases and regions, so search Xero Central for the report name if your screen differs. Reconcile the bank feed first, or some costs will be missing from the months they belong to.

Common mistakes

• Calling all wages fixed or all wages variable. Permanent staff are fixed; casual hours you add on busy days and cut on quiet ones are variable. Split the wages line if casual hours are a big part of it.
• Using one month. A single month mixes in annual bills, stock bought ahead and one-off repairs. Use 12 months to set the split, then watch monthly.
• Treating fixed as permanent. Fixed costs step up when you grow (a second site, another salary) and can be cut when you must. The split is a snapshot for decisions over the next few months, not a rule for ever.
• Leaving out your own pay. If you are a sole trader or partner, what you take out is not on the Profit and Loss. If the business has to pay you to be worth running, add a fair wage for yourself to fixed costs before working out break-even.
• Mixing up variable costs and Cost of Sales. They overlap a lot but are not the same. Cost of Sales is how your accounts are laid out; variable is how a cost behaves. Card fees are variable but usually sit in expenses.

Common questions

What is the difference between fixed and variable costs? Fixed costs stay about the same each month whatever you sell, such as rent, permanent wages and insurance. Variable costs rise and fall with sales, such as materials, packaging, card fees and commission.

Are wages a fixed or variable cost? Salaried and permanent staff wages are usually fixed, because you pay them whether sales are high or low. Casual hours that you add or cut with demand, and commission, are variable. Many businesses have a mix and split the wages line.

Is rent a fixed cost? Yes. Rent is the most common fixed cost: it stays the same until the lease changes, whatever you sell. Turnover rent, where part of the rent is a share of sales, is the exception and is partly variable.

Is cost of goods sold a variable cost? Mostly. Stock, materials and freight in rise with sales, so cost of goods sold is usually variable. Some businesses include production wages in cost of sales, and those can be fixed.

How do fixed and variable costs affect break-even? Break-even sales equal fixed costs divided by the contribution margin, which is 1 minus variable costs as a share of sales. With $264,000 of fixed costs and variable costs at 33.5% of sales, break-even is $264,000 divided by 0.665, about $397,000.

What is a semi-variable cost? A semi-variable or mixed cost has a fixed part and a part that moves with activity. Electricity is a common example: a base bill you pay regardless, plus more when you run equipment for longer in busy periods.

See your costs every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday, with a 24-month dashboard behind it. It covers the cash in the bank against the end of last month, sales and profit against last month and the same month last year, money owed to you that is past due, and bills due in the next two weeks against your cash. It does not split your costs into fixed and variable for you. It asks Xero for read-only access, and there is a 14-day free trial with no card.