Are support functions Fixed or Variable Costs?

Hello,

As topic suggests, how would you define support functions within a company? Would it fall under fixed costs because it's labor?

Thank you,

Rob

6.6k

Hi Anonymous,

First of all, usually support functions are classified as fixed costs. To understand why, we need to take a look at:

Definition of fixed and variable costs
Type of expenses behind what you call support functions

Fixed costs are the costs that aren't dependent on the level of goods/services produced. Variable costs change in proportion to level and services produced.

Support function costs are expenses associated with HR, Accounting and other corporate staff, which aren't influenced by the amount of goods/services produced. Therefore, support functions are fixed costs.

However, we could argue that if production of goods increases by a big enough amount (company grows), we will need to hire additional corporate staff, but in this case the costs will be classified as stepped fixed costs.

In any case, it looks like you are trying to understand how you could break down costs in a structured way. I would like to point out that fixed/variable split isn't the only one avaiable. There are different ways how you could break down costs (e.g. direct/indirect), and although fixed/variable is the most common one, it doesn't mean that it will be the correct one in a case that you receive. It's better to ask interviewer first about the preferred way of cost break-down.

Moreover, labor isn't always fixed cost. Actually, in managerial accounting labor is classified most often as a variable cost. The are many reasons for that, but for simplicity sake, you could use a simple rule of thumb:

if employees are paid by hour - variable costs
if employees get monthly salaries - fixed costs

Hopefully it helps.

- Tadeus

When preparing for case interviews, you'll quickly find that "fixed costs" and "variable costs" always come up. These concepts are important not only for financial analysis but also for strategic decision-making in companies. Let’s explore what these costs are and how you can skillfully use them in your cases. ✨ What are Fixed and Variable Costs?Fixed Costs are expenses a company incurs regularly, regardless of how much it produces or sells. These costs stay constant whether the company is active or not. Typical fixed costs include:RentSalaries for full-time employeesAdministrative expensesDepreciationWhether a company sells a lot or just a little, these fixed costs still need to be covered. They form the basis of a company’s cost structure and are crucial for long-term planning.Variable Costs, however, directly depend on business activity and change with the production level. They increase as more is produced and decrease when production is reduced. Examples of variable costs include:Raw materialsEnergy costsWages for temporary staffAn important point is that variable costs ideally drop to zero when there is no production. This makes them particularly flexible, as they can adapt to the current business situation.Together, these two cost types – fixed and variable costs – form a company’s total costs. To get a complete picture of the company's financial position, it’s crucial to divide costs into these two categories.At this point, be sure to check out the profitability framework. Profit is calculated by subtracting total costs from revenue. To understand cost behavior, it’s essential to segment them into fixed and variable costs – a perfect exercise!You can find more frameworks in our Case Interview Basics. 🚀