## Advantages of Classifying Overheads into Fixed and Variable
Segregating overheads by behaviour (fixed vs variable) is a foundation for cost control and decision-making.
| Advantage | Explanation |
|---|---|
| Controlling Expenses | Segregation helps control costs. Fixed costs are policy-related and remain constant regardless of output, while variable costs change with activity volume and can be controlled by adjusting output. |
| Preparation of Budget Estimates | Enables a flexible budget — costs can be estimated at different activity levels and compared with actuals. |
| Decision Making | Supports key decisions: setting prices during tough times, make-or-buy decisions, and shut-down-or-continue decisions. These require fixed and variable costs to be separated. |
> Why it matters: Fixed costs cannot be controlled at the operating level (they are policy decisions); variable costs can. Flexible budgeting and most short-run decisions collapse without this split.