1. Money

Understanding Fixed and Mixed Cost Behavior for Arts and Crafts Businesses

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The first article in this series about job costing for your arts and crafts business is an introduction to job costing. The second article in this series is about understanding cost behavior. The third discusses discusses arts and crafts variable costs. This article discusses the last two job costing expenses: fixed and mixed.

Fixed Costs

Fixed costs don't change in total to changes in activity. Thinking about your dinner party from the previous section, let's say you hire a DJ to provide entertainment. If you have one or 100 people at your event, the cost of the DJ will stay the same - which is whatever your contract with the DJ specifies.

In the arts and crafts business world, here are a few typical examples of fixed costs:

  • Advertising: Advertising is the cost of making the public aware of your product, maybe through print, television or radio ads. If you wholesale your arts and crafts, you probably advertise in trade publications, which are magazines, tailored to the specific industry.

    While the amount your arts and crafts company budgets for advertising may vary from year-to-year, the cost of advertising is not directly tied to sales activity. Therefore, in managerial accounting lingo, it is deemed a fixed cost. I'll talk about budgeting for costs such as advertising in a later lesson.

  • Studio or Shop Rent: The cost to use the studio space where your company makes its produce is a fixed cost too. No matter how many items your company sells, the cost of rent remains the same - whatever is called for in the lease agreement.

    If your arts and crafts business is lucky enough to own the building, the same principle holds true. Your company's mortgage payment will be the same month-to-month and will not vary based upon activity. The only event that will cause a mortgage payment to vary is if your company renegotiates terms with its lender, but that is definitely not an event you can directly tie to any arts or crafts item you hand craft. By the same token, property tax for the factory is a fixed cost as well.

  • Shop or Sales Manager Salary: If you sell your arts and crafts wholesale, you may have a shop or sales manager. Anytime you hear the term 'salary' you can rest assured that it's probably a fixed expense. This is because after the interviewing process is complete, your arts and crafts company extents an offer of an annual salary to the potential employee. Within reason, and following federal fair labor standards, the amount your salaried employee is paid does not hinge on how many hours they work each week. If their salary is $500/week, they get paid $500 per week.

    Also relevant is the fact that a shop or sales manager's salary is not directly tied to one of your arts or crafts product. Remember, variable costs have to associate directly with a product or activity. That's why you consider these costs as fixed.

  • Mixed Costs

    Mixed costs are also known as semi variable costs. Semi variable costs occur when a cost you normally consider to be fixed has some elements of being variable. Here are two examples:

    • Telephone: The line charge to have telephone service will be the same each month, however the cost for long-distance calls won't be. For a business, you can't necessarily associate the cost of long-distance telephone calls with activity levels.

      This is because there is no way of knowing how many of your customers are local calls or how many long distance customers initiated the telephone call thus incurring the long-distance charge themselves. Keep in mind that if you have a bundled flat rate telephone package that this migrates over to the fixed expense category for job costing.

    • Equipment costs: The cost to buy or rent a piece of equipment is fixed. It's whatever is on the price tag or lease agreement. However, the cost to operate and maintain equipment is not. Depending on the arts or crafts manufacturing hours your company places on its machines, the cost of maintenance will vary.

    In the next article in this series about job costing, I bring all job costing info in this and prior articles together in a breakeven point analysis. Use this to figure out how many arts and crafts items you need to sell to cover your costs.

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