Commercial enterprises can be said to generally have two separate divisions of overhead cost. These are fixed and variable costs. The difference between these types of costs is essential to understanding what can and what cannot be reduced in the event that a company seeks to aggressively cut overhead.
Fixed Cost
Fixed costs are expenses that will exist independent of production or productivity. Fixed costs will be the same whether a manufacturing facility is operating at peak capacity, or closed and locked on Christmas day. These can include taxes, rent, monthly fees for telephone or internet, or any cost which will be incurred whether the company is open or closed.
Variable Cost
These are costs which fluctuate depending on the productivity of the business. In manufacturing, an example of a variable cost will be the electricity used to power the facility. During a slow, or less productive month, electrical usage will be lower, but so will profitability. Additionally, the cost of power can vary depending on the cost-per-unit of power.
Overtime is another variable cost that changes from one month to the next. Authorized overtime can cost a company significantly, but if that overtime is well used and contributes to better productivity, then the overtime in a cost/benefit analysis will actually prove to be cost saving.
