What is a step fixed cost?

by maccie1, flickr.com

From previous posts, you know what a fixed cost is.  There is another type of fixed cost called a step (or stepped) fixed cost.

A step fixed cost takes its name from the fact that the cost can take a “step up” if certain things happen. This usually means a cost increases when the activity of a business exceeds a certain level, and the fixed cost then suddenly increases, but remains fixed at this new higher level.

Here are two examples which may help you to understand.

1) Employer liability insurance costs may remain quite stable until a certain threshold is reached. For example, it may cost €10,000 to have cover for up to 100 staff, but €15,000 if the staff number exceeds 100.

2) Typically, internet hosting costs include a high allowance for data traffic volumes. But if a company exceeds this, they may have to change to the next package up. This typically would give a much greater data traffic allowance, and the cost would increase in a step fashion.


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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

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