Step cost calculator

Whether your business is expanding or struggling, identification and understanding of its step costs could help generate more profits.

Extra costs

A step cost is one that is relatively fixed within a certain range, outside of which it can change dramatically. As an accountant, you are in the best position to identify the step costs in your business. If the extra expense is large enough, it can make a material difference to profits.

By reviewing your cost base, you can identify the most significant step costs and, importantly, calculate the point at which variables in the business will result in a step up to the next level of cost. Use our Step Cost Calculator to summarise your findings. Then, by considering ways of delaying or reducing your step costs, you can make a big difference to the impact they may have on your profitability. During your budget process, budget holders should be asked to consider ways of delaying or reducing step costs.

Example

For example, if your existing leased office space has the capacity to accommodate 100 employees, this comes at a particular annual rental that will not vary whether you have one or 100 employees. Once you expand to more than 100 employees, you will need more space. You can’t acquire additional leased office space in one-person sized increments; therefore, leased office space is a stepped cost.

Let’s say the minimum sized extra office space accommodates 25 people but you only need to accommodate an extra ten employees; you will incur a 25% increase in your annual rental costs for a 10% increase in staff. The next step in your leased office costs will come when you have reached 125 employees.

In this example, the step cost could be reduced or delayed in a number of ways: altering office space layouts to accommodate more employees; by hot-desking employees who spend time out of the office; initiating a work from home scheme; or temporary use of overflow office space in serviced offices.