![]() In extreme circumstances the behaviour of even the most consistent fixed expense is likely to change. The behaviour of an expense after a loss has occurred should not play any role in how it is classified. For example, in a manufacturing business which consumes a lot of water and power to operate, the utilities cost is likely variable, but for a convenience store which uses the same amount of heat and light regardless of sales levels, utilities would be a fixed expense. Other expenses can fall into a bit of a grey area and whether they are fixed, or variable will depend on the nature of the business. For example, the largest variable expense in a clothing store would be the cost of the clothing they sell. The most common example of this is the cost of whatever product it is the business is selling. ![]() Examples of variable costs include: Fuel. The amount you spend increases directly along with the amount of miles you drive. Variable costs are the expenses you pay when you drive your truck. On the other hand, variable expenses are those which vary directly with sales. Truck mortgage payments and insurance payments are usually the biggest fixed costs. ![]() Whether a business has sales of $10,000 or $20,000 per month, the amount of rent they pay for the space is likely the same. The easiest example of a fixed expense is rent. Fixed expenses are those costs which do not change within a reasonable range of sales. When we talk about identifying fixed and variable expenses for the purposes of a BI claim, what we are talking about is, how does the expense behave during the normal operation of the business. The issue that often trips people up is thinking in absolutes, such as, how would the expense behave in the event the business is shut-down? But, this is not the way to look at this issue. It may sound like a simple concept at first, but classifying expenses as fixed and variable in the context of a business interruption claim can be tricky.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |