Fixed and Variable Costs

Fixed cost is the setup cost for preparing to assemble a bill of material one or more times. The fixed cost is a one-time cost which is the same regardless of the number of times you assemble the build quantity of the master item.

Variable cost is the cost of assembling the build quantity of a bill of material exactly once.

When you assemble a bill of material, the program multiplies the variable cost by the number of assemblies (not the number of master items produced). The cost of labor for an assembly is an example of a variable cost.

For example, consider the following bill of material:

Master item = Mixture A

Build quantity = 10 bottles

Components: X1 = 3 boxes, Y1 = 4 cans, Z1 = 7 lb.

Fixed cost = $16.00 (for setup)

Variable cost = $15.00 (for labor)

Assembling the preceding bill of material five times:

• Produces fifty bottles (5 times 10 bottles) of the master item
  (mixture A).

• Requires 15 boxes of X1, 20 cans of Y1, and 35 pounds of Z1.

• Incurs a fixed cost of $16.00 (this is the setup cost).

• Incurs a variable cost of $75.00 (5 times $15.00).