Differences Between Fixed Cost And Variable Cost

Throughout economics, variable costs and fixed costs are the two main types of costs incurred by a business throughout manufacturing products and services. The distinction between fixed and variable costs is that fixed costs do not change with volumes of activity, whereas variable costs are closely linked with volumes of activity. Thus, fixed costs are incurred over a period of our time, while variable costs are incurred as units are produced.

Fixed Cost – Fixed costs are referred to as those costs which do not record a change with an increase or decrease in a company’s quantity of goods produced. Unlike variable costs, fixed costs for a company do not vary with the production volume. Fixed costs are those costs that a business will bear regardless of output rates. Lease and rent payments, utilities, insurance, some salaries, and interest payments are the most common examples of fixed costs.

Variable Cost – Variable costs are a company’s costs that are related to the amount of products or services it produces. Reckoning on the quantity of production during a company, the variable cost increases or decreases. When production volume goes up, the variable costs will increase; on the opposite hand, if the quantity goes down, so too will the variable costs. the assorted samples of variable costs are the cost of raw materials that are used for production, sales commissions, labor cost, etc.

The key differences between ‘Fixed Cost’ and ‘Variable Cost’:

Fixed Cost –

  • Fixed costs are referred to as those costs which do not record a change with an increase or decrease in a company’s quantity of goods produced.
  • If a firm produces or not, the fixed costs will never be zero. All the operating costs are good.
  • Fixed cost is time-dependent and changes after a certain time period.
  • Lease and rent fees, taxes, benefits, other salaries, and interest rates are the most common examples of fixed costs.
  • Fixed costs are incurred irrespective of any units are produced or not.
  • Fixed costs are not related to output since they remain constant regardless of the output level.
  • For an increase in the amount of units produced, fixed costs decline, and the increased production results in lower costs that raise income.
  • The average fixed cost falls throughout and forms the shape of a rectangular hyperbola.

Variable Cost –

  • Variable cost is referred to as that form of cost showing variations as per changes in production rates.
  • Thus, the variable costs are going to be zero; within the short-run when production is temporarily stopped, there’ll be no variable costs.
  • Variable costs are volume-dependent and volume-based adjustments.
  • Types of variable costs for production may involve labor, fees, packaging, and raw materials.
  • Variable costs are incurred as and when many units are produced.
  • Variable costs are connected positively to output; if the output is zero, the variable costs are always zero and vice versa.
  • Variable cost remains the same regardless of the number of units produced, and there’s no impact on profit with the extent of production.
  • Initially, the average variable cost decreases as the production rises and later it begins to climb upwards, thus assuming the “U” form

The more a company has fixed costs, the more sales it needs to break even, which means it will work harder to manufacture and sell its goods. Although variable costs tend to stay constant, the effect of the fixed costs on the bottom line of business may change depending on the number of products it produces.

 

Information Sources:

  1. investopedia.com
  2. economicsdiscussion.net
  3. byjus.com