Cost Controls

Cost Controls – Fixed and Variable, Cost Centres, Expense Minimisation

Fixed and variable costs

  • Before a business can control its costs, management must have a clear idea of what those costs are.
  • Fixed costs do not change when the level of activity changes – they must be paid regardless of what happens in the business. For example: salaries, insurance and lease.
  • Variable costs are those that change proportionately with the level of operating activity in a business. For example: materials and labour.
    • Companies can usually decrease variable costs (through increased efficiency) e.g. JIT inventory management, new technologies.

Cost centres

  • Cost centres are sections of a business to which costs can be directly attributed.
  • Direct costs: can be allocated to a particular product, activity, department or region.
  • Indirect costs: typically shared by more than one product, activity, department or region.

Expense minimisation

  • Guidelines and policies should be established to encourage staff to minimise expenses where possible, for example, eliminate waste and unnecessary spending.
  • Expenses reduce profits. – Savings can be substantial if people take a critical look at costs.


Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.