Is Sales Commission a Variable Cost? Everything You Need to Know

Even after a successful sales season, your profit margin stays disappointingly low. 

You had high hopes of making good returns. But the numbers remain flat. 

You review your sheet and realize where all the money went.

The raw material you bought was costly. Even after high sales, the selling charges ate a huge portion of the profit.  

You were clear about your fixed costs. Expected they would settle at a specific amount, which they did.

But it turns out you overlooked your variable pay. And it just went out of control.  

So, how important is knowing about your variable cost? How is it different from a fixed cost? What are the types of variable costs? Is sales commission a variable cost?

Let's find answers to all these questions in this article. 

Is sales commission a fixed cost or a variable cost?

Sales commission is a variable cost. 

This is because sales commissions depend on sales performance, sales volume, and the value of each sale. 

In months when sales reps sell more, they get a higher commission. But during slower months with fewer sales, the commission paid will be less. 

Fixed costs are not influenced by any external factors. They remain the same irrespective of sales volume or production levels. 

For example, rent, salaries, and insurance premiums are considered fixed costs, as they stay the same month after month.

What is the difference between Variable and Fixed Costs?

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What is the Formula and Calculation of Variable Costs

Imagine a T-shirt manufacturing company, Tee Rex produces and sells 1,000 T-shirts a month. Each T-shirt costs Rs 150 in raw material and labour. 

So the variable cost for Tee Rex company will be:  

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So, the total variable cost for producing 1,000 T-shirts is ₹1,50,000.

This cost will increase if more T-shirts are made and decrease if fewer are produced.

Types of Variable Costs

Depending on a company’s operations, the types of variable costs can vary. However, most companies typically incur the following as variable costs:

• Raw Materials: The cost of the basic materials used to produce the final product. 
• Direct Labor: Wages used to employees directly involved in the production. 
• Sales Commissions: Payment for sales reps depending on the volume they sell. 
• Utilities: Service charges for electricity, gas, and water can go up with use and production. 
• Shipping: Cost of delivering products to customers varies depending on quantity and location. 

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These are some of the basic variable costs incurred by companies across industries and operations. 

How Can Variable Costs Impact Growth and Profitability?

Variable cost has a direct impact on your business's growth and profitability. 

As production and sales increase, so do these costs. So it is important you keep it under control so that it doesn't negatively impact your profit.  

Companies need efficient management to lower their variable costs. Buying raw materials at better deals, providing training to improve labor efficiency, optimize energy and resources usage are some of these best practices. 

These measures allow your company to become profitable faster. 

In short, when companies learn to efficiently manage their variable costs, they strategically achieve sustainability, healthy margins and long-term business growth.

Conclusion

A huge part of the unpredictability of variable pay comes with sales commission. 

You might sell more, but you also have to pay equally to the sales rep as commission. If not tracked properly, then the commission will override, and you will be left with no profit at all. 

So to keep your variable pay under control, you need an efficient solution - Kennect. 

We help control variable pay by automating calculations, providing insight into compensation trends, and increasing transparency around spending and margins.

Do not let your variable costs pay you a much bigger price. Take charge of it. 

Book a demo with us to know more about how Kennect can simplify your variable pay and protect your profits.

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