Overhead Costs Literature

The total cost of a product can be segregated into two broad components: fixed costs and variable costs. Unlike fixed costs, which are constant for a given time period, variable costs change proportionally to the volume of the production units. Variable costs can be defined as those costs that vary in direct proportion to the quantity of output.

Variable costs can be labour costs, material costs, or overhead costs. Material costs and direct labour costs (those labour costs that are directly related to production) are variable costs as these costs vary directly with output (Robert, Pp.96). Examples of variable costs are packaging material costs, fuel cost for a transport company, and so forth. Variable cost is not the same for all firms in an industry. It depends on many factors such as size of the firm (large firms may have lower variable costs because of economies of scale), strategy of firm (self-production or subcontract), and so forth (Srikant, Pp.67).

Certain costs that are currently fixed in nature can be turned into variable costs and vice versa. For example, by subcontracting the loading and unloading activity that was earlier done by permanent employees, a firm will have to pay a charge based on the actual volume instead of the fixed wages to the current employees. Similarly, costs that are variable in nature can be converted to fixed costs. For example, a firm that was earlier selling its products through retailers had to pay a fixed commission (margin) to the retailer. If the firm starts selling its products through its own retail outlets or through the internet, the costs become fixed, as they need to pay rental, salary, and other costs. One of the reasons for cheaper prices over the internet than at retail outlets is that while the company saves significantly in terms of commission and other selling expenses, the fixed costs are also very low (Richard, Pp.37).

Dell is able to auction its products online at a cheaper price because it saves in variable costs such as dealer's commission, store expenses, and so forth. Further, since Dell auctions huge quantities at a time, the fixed costs per unit decrease significantly. The e-tickets concept became so popular because airlines can save the variable costs that were earlier incurred in printing tickets, commission to airline agents, and so forth. Such benefits ultimately were transferred to the customers (Craig, Pp.123).

Furthermore, there are certain costs that ...