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.
Key Takeaways
- Fixed costs do not change with production levels, while variable costs depend on output.
- Fixed costs include rent, insurance, and salaries; variable costs include raw materials and utilities.
- Understanding fixed and variable costs helps businesses make informed pricing and production decisions.
Fixed Cost vs Variable Cost
Fixed cost is a type of cost that does not change regardless of the number of products made by a company, and they are stable in the near term. Variable cost is the amount related to the production of goods by a company that changes based on the generated output. It increases or decreases with production growth.
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
| Parameters of Comparison | Fixed Cost | Variable 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. |
| Example | 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. |
| Real-life instance | Calls 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 cost | Fixed costs alter with the passage of a specific amount of time. | As a result of the quantity created, the variable cost varies. |
| Impact on profit | As 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 the first quarter is 4,000, 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 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 sales 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
- 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.
- 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.
- Calls made on the same platform at the same pricing might be used as a comparison and are examples of fixed costs, whereas, in the actual world, an example would be a phone conversation between two systems for variable costs.
- Fixed costs alter with the passage of a specific amount of time, whereas, as a result of the quantity created, the variable cost varies.
- 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.
- https://www.jstor.org/stable/10.15609/annaeconstat2009.127.0061
- https://www.sciencedirect.com/science/article/abs/pii/S2212012215000428
Last Updated : 23 August, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
This article is extremely helpful for business owners and managers. It’s so important to understand the difference between fixed and variable costs to make informed decisions about pricing and production.
Absolutely. This article sheds light on crucial aspects of cost management that many businesses may overlook.
The examples provided in this article make it very easy to grasp the concepts of fixed and variable costs. It’s a fantastic resource for those looking to deepen their understanding of finance.
What a comprehensive and informative article! The clear and concise explanations of fixed and variable costs make it easy to understand for readers of any background.
I completely agree! This is a very well-written piece that demystifies accounting concepts in a way that anyone can comprehend.