Step Cost
A cost that remains constant within a range of activity but rises abruptly when output exceeds a defined threshold.
What is Step Cost?
A step cost (also called a staircase cost) is one that behaves like a fixed cost within a defined range of activity but jumps to a higher level when output crosses a capacity threshold, then stays at that new level until the next threshold is reached. The pattern resembles a staircase when graphed: flat segments interrupted by vertical steps. Common examples include supervisory salaries (one supervisor can handle up to 20 workers; hiring more workers requires another supervisor), warehouse rental (a company leases additional space only when existing capacity is full), and machinery (a new machine is needed every 10,000 units of additional capacity). Step costs are important in budgeting and capacity planning because they create sudden increases in costs at specific volume levels, unlike smoothly variable costs. Within any single step, the cost behaves as a fixed cost.
Example
A call center employs one supervisor for every 15 customer service agents at a cost of $60,000 per supervisor. At 15 agents: 1 supervisor ($60K). At 16 agents: 2 supervisors ($120K). At 30 agents: 2 supervisors ($120K). At 31 agents: 3 supervisors ($180K). Each addition of a 16th, 31st, 46th agent triggers a $60K cost step.