Business is all about expense and income. Although the source of income is limited, the cause of cost is more than anything. For this reason, before beginning the business, one must arrange a good amount of funds.
Manufacturing cost is the most important and huge amount of expense. Apart from that, a businessman needs working capital to purchase raw materials. However, there are several other types of expenses. After observing these different types of expenses, the entire factor is divided into several other divisions.
Among them, one is step cost. Here we will discuss all step costs, such as different types of it and how it ultimately works. Besides, we will also let you know how to step cost differs from fixed and variable cost.
What is step cost?
The name of this expense is the step just because of its representation in the graph. Whenever step cost is represented in the graph, it shows like a staircase that may show as descending or ascending.
This type of cost determines a fixed amount of expense which is proportionate to work.
However, it may change as per the workload, and the cost can occur even due to crossing a limit of expense step. So, this type of expense may decrease or increase depending upon the manufacturing manner. Usually, step cost remains the same up to a specific period.
However, when there is a huge demand for a particular product manufactured by a company, the expense in production also increases. At that time, the amount of expense gets a rise, and so does the cost of production. On the contrary, decreasing step cost always does not mean a hike in expense.
Rather, decreasing expense also comes under the count of step cost. As mentioned, there is a threshold limit only after crossing, which it considered a high expense. On the other hand, if the expense does not touch even the limit and stays very low, it depicts a decrease in expense.
Step cost is volatile and proportionate to the workload so that it may decrease or increase. Whether the expense will come down or get a hike completely depends upon the demand of the product.
Several types of step cost
Whenever a businessman carefully evaluates his business's balance sheet, he may find out that most of the expenses come under step cost. Generally, every type of cost which may not fix for a long time includes stepping cost. Certainly, after opening a new company, the manufacturing cost will not remain the same after five years.
The cost of production may increase or decrease. Apart from that, there are many other step costs in a business. If you have appointed sales personnel, then they also need the monthly salary. Besides, you need to buy the fixed asset for your company.
Apart from that, if a company offers health insurance for its employees, it also comes under step cost. So, all these expenses can decrease or increase the number of employees. Controlling step cost is quite easy to evaluate because it sets a threshold limit. As a result, when the expense amount crosses the limit, a business person can easily calculate how much expense takes place.
How does step cost function?
It is not difficult to understand step cost is volatile and does remain fixed for a long time. However, the target of a businessman should limit the expense amount within the threshold amount. But there is no control over step cost if the activity of a company rises above the previous level.
For instance, a company was producing goods 2000 units per shift. During this time, step cost is fixed to a certain amount. Suddenly, with that company's growth, if the demand for the product also increases, then production cost also increases.
As a result, that same company is now manufacturing 2500 units per shift. This sudden demand in the market may prevail for a long time or may decrease after a particular season. However, during this time, the cost of production increases.
Apart from production cost number of employees also increases. To manufacture 2000 units per shift may require 1000 employees to work. But as the demand increases workforce also needs to increase. Now the company requires to pay more wages due to recruiting an additional employee.
Things that observed during step cost,
- The growth of the company is the primary factor of step cost. In most cases, due to increasing demand, such type of expense takes place.
- Sudden loss in business is another important outcome observed during step cost. It does not always mean an increase in expense. It has also been observed that sometimes a company faced loss. During loss or lack of demand, step cost decreased.
- The efficiency level of sales staff is also considered as best or worst. When the business analyst noticed the growth of the business, then the efficiency level of sales staff becomes the best. On the other hand, if the business growth is hampered, then the sales staff's efficiency level comes under query.
- To manage step costs, a businessman often finds the source of funds. While looking for investors, they may find or may not get any investors. However, there is nothing to worry about as a businessman can easily borrow business bad credit loans from direct lenders.
What is the basic difference between step cost, fixed cost, and variable cost in business?
Although you may not find any difference between several types of cost in business, they are different. To run a business, types of cost also vary from one expense to other. Here is a comparison between these three.
| Step Cost | Variable Cost | Fixed Cost |
| The cost remains the same for a long time. However, it may also change by derived demand of that product. In this way, the cost may arise. | Variable cost also may change as per the increasing or decreasing demand. This cost strongly depends upon the ups and downs of the market. | There is no chance of either increase or decrease in fixed cost. Generally, this type of cost in business is considered as a fixed cost. |
| It is volatile. | It is also volatile. | It remains the same all along with the business. |
| For example production of goods, wages of employees, new software introduction | For example: paying overtime to employees. | For example Corporate rent, repayment of business loans, electricity bills, etc. |
Therefore, identifying step cost is necessary because you can only understand whether the company is getting growth. Besides, due to the threshold limit, it helps evolve whether over expense takes place or not.
