What is a Step Cost?

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 cash‑flow more accurately.
• Set realistic pricing thresholds.
• Plan capacity and staffing needs.
• Identify hidden cost drivers in your cost structure.

Real‑World Examples

Manufacturing – Labor Shifts

Imagine a factory where one worker can produce 10 units per shift. The cost structure might look like this:

The labor cost stays flat within each range and jumps only when the next threshold is crossed – a classic step‑cost pattern.

Service – 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.

• 0‑25 guests → 1 waiter (fixed cost $1,800 per shift)
• 26‑50 guests → 2 waiters (fixed cost $3,600 per shift)

Healthcare – 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.

• 0‑4 patients → 1 nurse (fixed cost $3,500 per day)
• 5‑8 patients → 2 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 cost‑structure review.

Tools & Templates to Manage Step Costs

Leverage ready‑made Excel tools to model step‑cost behavior and visualize break‑points:

• Activity‑Based Costing Excel Template – helps allocate step costs to cost pools.
• Financial Dashboard Excel – track step‑cost trends over time.
• Automated Excel Reporting – generate periodic step‑cost reports automatically.

Quick “Step‑Cost” Recipe

1. List all cost items and the activity driver they relate to.
2. Group items by the range of activity they cover.
3. Plot each group on a cost‑vs‑volume chart to locate flat bands.
4. Mark the points where the cost jumps – those are your step thresholds.
5. Use the Activity‑Based 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 Activity‑Based Costing Excel template and start modeling your step costs today.

Tags: step cost, cost accounting, management accounting