A step cost is a cost that does not change steadily, but rather at discrete poin ts.

A step cost is a fixed cost within certain boundaries, outside of which it w ill change. When stated on a graph, step costs appear to be incurred in a stairs tep pattern, with no change over a certain volume range, then a sudden increase, then no change over the next (and higher) volume range, then another sudden inc rease, and so on. For example, a facility cost will remain steady until additional floor space is constructed, at which point the cost will increase to a new and higher level as the entity incurs new costs to maintain the additional floor space, to heat and air condition it, and so forth. As another example, a company can produce 10,000 widgets during one eight-hour s hift. If the company receives additional customer orders for more widgets, then it must add another shift, which requires the services of an additional shift su pervisor. Thus, the cost of the shift supervisor is a step cost that occurs when the company reaches a production requirement of 10,001 widgets. This new level of step cost will continue until yet another shift must be added, at which point the company will incur another step cost for the shift supervisor for the night shift. Step costing is extremely important to be aware of when a company is about to re ach a new and higher activity level where it must incur a large incremental step cost. Conversely, it should be aware of step costs when its activity level decl ines, so that it can reduce costs in an appropriate manner to maintain profitabi lity. The point at which a step cost will be incurred can be delayed by implementing p roduction efficiencies, which increase the number of units that can be produced with the existing production configuration. Similar Terms A step cost is also known as a stepped cost or a step-variable cost.