Once the Sales budget has been agreed, the costs of the business need to determined. 

Fixed Costs

Firstly, determine the fixed costs within the business i.e. those which must be paid no matter what sales are made.  Examples are:

  • Rent, rates and insurance
  • Bank charges
  • Interest payments on loans
  • Electricity, gas and water rates
  • Advertising costs
  • Wages, Salaries and expenses
  • Administration expenses such as accountancy

Variable Costs 

Variable costs i.e. those that will be incurred in line with the volume of sales.  Examples are:
  • Material costs
  • Distribution costs
  • Overtime costs

By separating out the fixed and variable costs the business can calculate the break even position for sales. The calculation is:

Break-even = Fixed Costs / (Sales - Variable costs)