Step costs are costs that stay fixed over a defined range of activity and then jump to a new level once that range is exceeded.
Definition of a Step Cost
A step cost is a cost that does not change continuously with each unit produced. Instead, it remains constant within a band of activity and then increases (or decreases) abruptly when production moves into the next band.
Step Cost vs. Fixed vs. Variable Costs
- Fixed cost: Same amount regardless of output (e.g., rent).
- Variable cost: Changes proportionally with each unit (e.g., raw material).
- Step cost: Fixed inside a band, jumps to a new level when the band is crossed.
Why Step Costs Matter
Understanding step costs helps you:
- Forecast cashâflow more accurately.
- Set realistic pricing thresholds.
- Plan capacity and staffing needs.
- Identify hidden cost drivers in your cost structure.
RealâWorld Examples
Manufacturing â Labor Shifts
Imagine a factory where one worker can produce 10 units per shift. The cost structure might look like this:
| Production Range (units) | Workers Required | Fixed Labor Cost |
|---|---|---|
| 0 â 10 | 1 | $2,000 |
| 11 â 45 | 5 | $10,000 |
| 46 â 50 | 5 (no change) | $10,000 |
| 51âŻ+⯠| 6 | $12,000 |
The labor cost stays flat within each range and jumps only when the next threshold is crossed â a classic stepâcost pattern.
Service â Restaurant Waitstaff
A restaurant can serve up to 25 guests per hour with one waiter. If guest flow rises to 30 per hour, a second waiter must be added, increasing payroll.
- 0â25 guestsâŻââŻ1 waiter (fixed cost $1,800 per shift)
- 26â50 guestsâŻââŻ2 waiters (fixed cost $3,600 per shift)
Healthcare â Nursing Shifts
Hospitals often staff nurses in blocks. One nurse can safely care for up to 4 patients. When patient census climbs to 5, a second nurse is required, causing a step increase in labor cost.
- 0â4 patientsâŻââŻ1 nurse (fixed cost $3,500 per day)
- 5â8 patientsâŻââŻ2 nurses (fixed cost $7,000 per day)
How to Identify Step Costs in Your Business
Use the checklist below to spot step costs during a costâstructure review.
| Step | Question to Ask | Typical Indicators |
|---|---|---|
| 1 | Does the expense stay constant over a range of output? | Flat line on costâversusâvolume chart. |
| 2 | Is there a clear jump when the range is exceeded? | Sudden spike at a specific production level. |
| 3 | Is the cost tied to a capacityâbased resource (e.g., labor, equipment, licenses)? | Cost linked to number of shifts, machines, or service staff. |
Tools & Templates to Manage Step Costs
Leverage readyâmade Excel tools to model stepâcost behavior and visualize breakâpoints:
- ActivityâBased Costing Excel Template â helps allocate step costs to cost pools.
- Financial Dashboard Excel â track stepâcost trends over time.
- Automated Excel Reporting â generate periodic stepâcost reports automatically.
Quick âStepâCostâ Recipe
- List all cost items and the activity driver they relate to.
- Group items by the range of activity they cover.
- Plot each group on a costâvsâvolume chart to locate flat bands.
- Mark the points where the cost jumps â those are your step thresholds.
- Use the ActivityâBased Costing Excel Template to allocate the step cost to products or services.
Take the Next Step
Ready to bring clarity to your cost structure? Download the ActivityâBased Costing Excel template and start modeling your step costs today.
Tags: step cost, cost accounting, management accounting
