Are salaries fixed or variable costs? This is a question that many people grapple with especially those with limited knowledge about accounting. When accounting for costs associated with running a business you will have fixed costs and variable costs. A fixed cost is one that never changes over a given accounting period.
A variable cost is one that may increase or decrease over the course of an accounting period. When a firm pays an individual a salary, it is regarded as a fixed cost of doing business. Wages will be a typical cost of doing business and will generally remain fixed over a period of time.
A fixed salary is compensation that is paid to an employee in the form of wages earned for work production time. These costs will remain relatively stable over the course of the month. Here’s an example: A foreman may have a salary of $2,500 per month. He will receive the same salary no matter how many hours he works for his employer in that month.
An accountant would put this figure into a fixed cost category when assigning costs of goods produced. An accountant will generally put the fee paid to laborers who produce goods for the factory in a labor account rather than in the payroll account. A labor account will allow the company to allocate this as an expense of producing the product rather than a cost in a specific period that would lower net income.
There are two categories for salaries paid. One is a direct fixed cost and this compensation affects the production cost of the product. This would be the wages paid to a production supervisor or production managers. These are reported as direct labor cost.
When salaries are paid to quality control and sales staff, these are categorized as manufacturing overhead costs. Fixed costs do not change during each accounting period. However, the cost per unit of the product can change as the production amount increases or decreases.
For example: A company that produces 1,500 widgets at a specific fixed production cost will have a lower fixed unit cost than a company which produces 1,000 widgets at that same cost. When allocating salaries paid to the cost of each widget, less cost is applied to the higher production of 1,500 widget units than the lower production of 1,000 widgets.
Any accounting that is done by professionals will follow generally accepted accounting principles. When a company reports production costs that include salaries allocated to the cost of production, this is one of the preferable reporting processes. With that said, salaries are generally regarded as a fixed cost!