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Thread: Is petrol considered fixed or variable cost?

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    Is petrol considered fixed or variable cost?

    Would petrol consumption on a company vehicle be considered fixed or variable cost?

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    Bronze Member Miro Bagrov's Avatar
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    It can't be fixed. It's not a standing obligation which has a determinable amount.

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    Silver Member Petrichor's Avatar
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    Agree with Miro. Petrol expense always depends on the amount of work you perfom, therefore it must be variable.

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    I would have assumed it to be a fixed expense even though it fluctuates because it is the same as utilities. The more items produced the more electricity is consumed but yet electricity is a fixed cost? Petrol indirectly affects the price of an item. If it were to affect the price directly such as a raw material then it would be considered variable...

    Im just trying to understand it. I could be wrong altogether. Any other views?

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    "Fixed or variable?" analysis is one of those things that sounds straightforward on paper, but then gives rise to subtle wrinkles and gray areas in practice (as you're encountering here).

    First consider the purpose for which you need to categorize the petrol costs. Frequently the context will provide guidance. For example, if you're putting together an analysis of your company in comparison to competitors and industry averages, you'd want to treat petrol costs the same way as it's treated in the compiled industry data, in order to get a meaningful apples ↔ apples comparison.

    Specific context aside, though, the general defining distinction is not that variable costs are those that simply, well, vary, but rather those that vary as a function of production volume*. Hence the utility costs you mentioned as an example are typically considered fixed, even though there are month-to-month variations in the amount. While production volume does have an influence on electricity consumption--as you noted--a large portion of the typical utility bill is more a function of the fixed capacity and resources (such as heated square footage, lighting, etc.).

    *(The reason for defining fixed vs variable that way is because it's the most useful method for most budgeting and planning purposes.)

    In fact (sticking with utility costs as the example for a moment), a better approach might be to bifurcate it into a fixed component and a variable component. Different ways to tackle that one, but a common tactic is to run a regression against historical data. The results might suggest that there is a certain base component to the electricity consumption, but also a variable component with a strong correlation to production volume.

    In such case I tend to include both a variable component, and a fixed component, for typical budgeting and forecasting purposes.

    Hence, it might be helpful looking at your petrol costs similarly; it all depends on your particular fact-set. Regardless, the point is that for some costs, once you get 'em under the microscope you realize that the fixed-or-variable distinction isn't exactly textbook clear-cut. If so, you'll just have to consider your particular context and evaluate the extent to which production volume drives the fluctuations.

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    Abdi (01-Nov-12), Dave A (31-Oct-12)

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    Site Caretaker Dave A's Avatar
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    I ran this past my recently graduated accountant and her answer was - "tricky, it depends on the industry". And that was in relation to petrol and electricity.

    Quote Originally Posted by ArcSine View Post
    *(The reason for defining fixed vs variable that way is because it's the most useful method for most budgeting and planning purposes.)
    I think that's the key in this.
    The trouble with opportunity is it normally comes dressed up as work.

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    Quote Originally Posted by Dave A View Post
    ... and her answer was - "tricky, it depends on the industry". ...
    Exactly, industry as well as context. (BTW, pass my congratulatory tip o' the cap along to your new grad, Dave ). Petrol, e.g., is very much a variable cost for a trucking company, but a fixed cost for the outfit that furnishes company cars to their execs for their daily home ↔ office commute.

    But there's even an "it depends" component within a given company. If my electricity consumption is largely a function of my physical facilities (i.e., amount of square footage), and I'm running "what if" scenarios...

    ...that involve varying levels of production within my current facilities, then utilities will be a fixed cost for purposes of those pro formas.

    ...that involve various scenarios of expansion and contraction into larger / smaller facilities, then utilities will be a variable cost (as a function of square footage) for this purpose.

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    This is something that can be made as complicated as you want it to be

    If the petrol in the original question relates to management as opposed to delivery, it is fixed. If delivery then variable. If both then split it. If it's not material then ignore it

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    So in my kind of business we should rather use two categories one called petrol and the other transportation. Awesome guys.. Makes sense now.

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