Difference Between Fixed Cost and Variable Cost (With Table)

Fixed, variable, as well as semi-variable expenses, have been divided into three groups based on variance. A fixed cost, as its term implies, is one that remains the same no matter how many units are manufactured. As the number of outputs generated increases, so do variable costs. Semi-variable expenses together have fixed and variable features.

Fixed Cost vs Variable Cost

The difference between Fixed Cost and Variable Cost is that fixed costs are those costs that an institution must pay during the duration of its existence, whereas when it comes to the average variable cost, it’s determined by how much a company produces in a quarter.

Fixed cost is the cost that does not change regardless of the number of products produced by a company. Because of this, they aren’t influenced by swings in the firm’s activity levels. Fixing costs doesn’t guarantee that they won’t change shortly, although, in the near term, they are likely to be stable.

Variable cost includes the amount that varies with variations in the size of output generated. When the company’s current activity level fluctuates, they are immediately impacted by it. As a result, variable cost increases proportionally with the production growth, and if there’s no manufacturing, there is no variable cost. 

Comparison Table Between Fixed Cost and Variable Cost

Parameters of ComparisonFixed CostVariable Cost
Definition Fixed Cost is the money that a corporation has to spend regardless of how many workers it hires or how successful it is at creating items. Variable Costs are the quantities spent by a corporation on several aspects.
ExampleAdvertisement and insurance are all costs associated with renting, buying, or maintaining the services under fixed costs.A classic example of variable cost is how much material is being purchased and how much is being provided to the workers.
Real-life instanceCalls made on the same platform at the same pricing might be used as a comparison are examples of fixed cost.In the actual world, an example would be a phone conversation between two systems for variable costs.
Nature of costFixed costs alter with the passage of a specific amount of time.As a result of the quantity created, the variable cost varies.
Impact on profitAs a result of increased output, expenses are reduced, and profits are increased in fixed costs.The level of output has no effect on earnings in variable costs.

What is Fixed Cost?

Fixed cost is the cost that does not change regardless of the number of products produced by a company. Because of this, they aren’t influenced by swings in the firm’s activity levels. Fixing costs doesn’t guarantee that they won’t change shortly, although, in the near term, they are likely to be stable.

When a firm rents space to operate, regardless of whether or not it produces anything, it must pay rent for the space. This is a fixed amount that remains constant throughout time until the rental of the space increases or lowers. Fixed costs are all those expenses that a corporation must pay regardless of how much it produces.

Here is an instance illustrating the example of fixed cost. For example, if somehow the fixed cost is 10,000 as well as the output generated during first quarterly is4,000,5,000, as well as 3000 units respectively. The fixed cost, in this case, the total fixed cost, is the same for all three quarters. 

What is Variable Cost?

Variable cost includes the amount that varies with variations in the size of output generated. When the company’s current activity level fluctuates, they are immediately impacted by it. As a result, variable cost increases proportionally with the production growth, and if there’s no manufacturing, there is no variable cost. 

This cost is closely related to the number of units generated by the business. As a result, variable costs stay the same for each item, although they have changed. For instance, if somehow the variable cost per unit is Rs. 6 and the production generated in the first, 2nd, as well as the final quarters is5000,6000, and 4000 units respectively, one can see how this works.

Considering that perhaps the quantity of output has varied in all three quarters, one might wonder if the variable cost has altered as well, but just in the entire value, not by the unit price. Variable costs go up when productivity or selling go up, and they go down when productivity or sales go down. As the name suggests, variable costs are expenses that fluctuate concerning the quantity produced or sales.

Main Differences Between Fixed Cost and Variable Cost

  1. Fixed Cost is the money that a corporation has to spend regardless of how many workers it hires or how successful it is at creating items. On the other hand, Variable Costs are the quantities spent by a corporation on several aspects.
  2. Advertisement and insurance are all costs associated with renting, buying, or maintaining the services under fixed costs. A classic example of variable cost is how much material is being purchased and how much is being provided to the workers.
  3. Calls made on the same platform at the same pricing might be used as a comparison are examples of fixed cost, whereas, in the actual world, an example would be a phone conversation between two systems for variable costs.
  4. Fixed costs alter with the passage of a specific amount of time, whereas, as a result of the quantity created, the variable cost varies.
  5. As a result of increased output, expenses are reduced, and profits are increased in fixed costs. On the other hand, the level of output has no effect on earnings in variable costs.

Conclusion

Many practitioners of cost accounting are unable to distinguish between fixed costs and variable costs. A fixed cost does not fluctuate with the degree of activity during the short term. However, variable costs pertain to the price of items that tend to fluctuate with the amount of activity, whereas fixed costs refer to the price. 

When calculating production costs, it’s important to understand the distinction between fixed and variable expenses. Now, based on the previous explanation, it may be evident that perhaps the two expenses are opposites because they aren’t the same in any way.

References

  1. https://www.jstor.org/stable/10.15609/annaeconstat2009.127.0061
  2. https://www.sciencedirect.com/science/article/abs/pii/S2212012215000428
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