Variable costs change in proportion to your business activity or sales volume. Examples include raw materials, direct labour, shipping costs and sales commissions.
Variable costs fluctuate directly with your level of business activity. When you sell more, variable costs increase; when you sell less, they decrease. Common variable costs include raw materials and components, direct labour (hourly workers), shipping and delivery costs, sales commissions, payment processing fees and packaging materials. The key characteristic is that variable costs are roughly proportional to volume - if sales double, variable costs approximately double. Understanding your variable cost structure is essential for pricing decisions, break-even analysis and contribution margin calculations. The relationship between fixed and variable costs determines your operating leverage - businesses with high fixed costs and low variable costs have high leverage (profits grow rapidly once break-even is exceeded, but losses accumulate quickly below break-even). SortBooks helps separate variable costs from fixed costs in Xero, enabling accurate break-even analysis, contribution margin calculations and profitability modelling.
SortBooks helps with the bookkeeping behind variable costs by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing variable costs by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Fixed costs are business expenses that remain constant regardless of your sales volume. Examples include rent, insurance premiums, salaries of permanent staff and loan repayments.
Contribution margin is the amount remaining from sales revenue after deducting variable costs. It shows how much each sale contributes toward covering fixed costs and generating profit.
The break-even point is the level of sales at which your total revenue equals your total costs, resulting in zero profit or loss. It tells you the minimum you need to sell to cover all expenses.
COGS represents the direct costs of producing or purchasing the goods your business sells. It includes raw materials, direct labour and manufacturing overhead but not selling or administrative expenses.
Operating expenses are the day-to-day costs of running your business, excluding COGS. They include rent, wages, utilities, marketing, insurance and administrative costs.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.