What is a fixed cost?
Fixed cost means the cost is constant and remains the same regardless of production output. Common fixed costs are rent of the land, insurance, interest payment, utilities, etc. It doesn’t mattahce how many products you produce, these fixed costs are steady. Fixed cost is also known as an overhead cost or indirect cost.
Here are explanations what shipping cost should belong to
Shipping costs vary by shipment, so the shipping cost is not a fixed cost but a variable cost. The inbound shipping cost is associated with production so it is considered a direct cost. The outbound shipping cost does not tie to production so outbound cost is classified as an indirect cost.
Is shipping a fixed cost?
Generally speaking, shipping is not a fixed cost, because shipping costs vary by volume, weight, and distance. Shipping is a variable cost
What are considered fixed costs?
Below list of categories that count as fixed cost
- lease
- Rent
- Utilities
- Insurance
- Interest payment
- Purchase machine
- Purchase land
- Purchase Warehouse
- Warehouse maintenance
What is a variable cost?
Variable cost varies with the amount of product produced or the amount of service provided. For example, labor cost is a variable cost. if you produce more products then you probably need more labor hours. Increased labor hours will lead to extra labor costs. Any cost that changes as the product number changes are variable costs.
Common variable cost list
- Raw material
- Packages
- Labors
- Wages
- Electricity
Is shipping a variable cost?
Yes, shipping is a variable cost. Shipping cost is decided by how much quantity you will ship. Your shipping cost will be more or less dependent on your shipping volume. The shipping cost does not depend on how big or how little you produce. You may produce a small amount of product this year but you could purchase more raw material and stock up, then your shipping cost is high. The shipping cost does not go up and down with product quantity, so the shipping cost is variable.
What’s the difference between fixed cost vs variable cost?
The main characteristic to differentiate fixed cost and variable cost is to see whether the cost goes up and down with the product quantity. Let’s assume the raw material cost is $2 per unit, one complete product will use one unit of raw material, so two products will use two units of raw material. the more product produced the more raw material going to be needed. The raw material cost goes up when produce more. The raw material cost goes down when producing less, so raw material cost is a variable cost. How about the rent of a warehouse? the rent is a fixed cost. It does not matter how large or how little you produce, your warehouse rent is going to be the same. Warehouse rent is a fixed cost.
What is a direct cost
Direct cost means the cost goes directly to producing goods or services. Direct cost includes direct labor, direct material cost, direct wages, etc. Any cost that is directly associated with a product or service that a company produces is a direct cost. Direct cost belongs to COGS (Cost of goods sold).
Is shipping a direct cost?
It depends on whether the shipping is inbound or outbound. If the shipping is freight-in cost then it is a direct cost. Shipping raw material to a factory is a direct cost because this cost goes directly to producing goods. If the shipping is outbound, the shipping cost is indirect. For example, shipping a finished product to a customer, is not a direct cost. It will be an indirect cost
Is direct cost variable or fixed?
Most direct costs are variable costs. Raw material cost, labor costs are all direct costs, because these costs are tied up with production. These costs are also variable because they fluctuate with the production volume. Some direct costs like the salary of the manager, rent of land are fixed costs. These costs are constant and they do not change as the production size changes
Is shipping an operating expense?
Operating expense is an ongoing cost to run your business. Operating expense includes rent, equipment, inventory, payroll, administrative fees, etc. Shipping is an operating expense if the shipping is outbound. Outbound shipping means that you ship products to customers. This outbound shipping cost is an unavoidable expense for sales. If the shipping is inbound meaning bringing raw material, machines to the factory then it is not an operating expense. This inbound shipping cost belongs to COGS.
Is shipping a product cost?
Product cost is also known as production cost. This cost is related to producing a product or providing service. Production cost includes a wide variety of expenses such as raw material, labor, wages, utilities, rent, lease, etc. All these costs contribute to making the product so they are production costs. if the shipping is a delivery fee then it is not a product cost. If the shipping is bringing stuff into a plant then it is a product cost.
Is shipping a period cost?
Period cost is the expense that you need to pay periodically. Period cost is not affected by production level. Think about the rent, insurance, salary. you need to pay these expenses monthly whether you make a product or not. Shipping cost is not decided by production so the shipping cost is a period cost.
Difference between product cost and period cost
Product cost is tied directly with producing the product. if you stop production and all these costs will be gone. such as raw material cost, worker’s wage, electricity, etc. Period cost is not connected to production. those costs are rent, administration fee, insurance, rent, etc. you will pay this kind of cost periodically, and this cost does not go up and down following the production level
Summary
In conclusion that shipping is not a fixed cost. Shipping costs are different for each shipment, so the shipping costs are variable. Inbound shipping is a direct cost because this cost is directly associated with production. You can not produce without bringing in material, package, tools, etc. Outbound shipping is an indirect cost because this cost has nothing to do with production. Outbound shipping is also called indirect delivery cost.
