Difference Between Fixed Cost and Variable Cost
Before we look at the difference between Fixed Cost and Variable Cost, let’s take a look at what is a Fixed Cost and a Variable Cost.
Fixed cost is the expense that stays the same, no matter how much a company produces. These costs must be paid, whether the production level is high or low. Unlike variable costs, fixed costs are harder to control because they are not linked to production factors like the number of goods produced. Examples of fixed costs include rent, salaries, and property taxes.
Variable cost changes based on the amount of goods a company produces. When production increases, variable costs go up; when production decreases, they go down. Examples of variable costs include the cost of raw materials, sales commissions, and wages for production workers.
The below table will help students understand the difference between fixed and variable costs in an easy manner.
Fixed Cost and Variable Cost Examples
Fixed costs are expenses that stay the same no matter how much a business produces. Examples include rent, salaries of managers or office staff, property taxes, insurance, and depreciation of equipment.
Variable costs change with the level of production. Examples include the cost of raw materials, wages for workers based on hours or output, sales commissions, packaging costs, and utility bills like electricity that increase with more production.
Fixed Cost and Variable Cost Formula
Fixed Cost Formula:
Fixed Cost = Total Cost - (Variable Cost per Unit × Number of Units Produced)
Variable Cost Formula:
Variable Cost = Variable Cost per Unit × Number of Units Produced
FAQs on Fixed Cost and Variable Cost
1. Can a cost be both Fixed and Variable?
Yes, some costs have both fixed and variable components. For example, utility bills may have a fixed base charge plus a variable charge based on usage.
2. How do Fixed Costs affect a Business?
Fixed costs create a consistent expense for a business. These costs must be paid even if the company is not producing anything, so they can be a financial burden during low production periods.
3. How do Variable Costs Affect a Business?
Variable costs fluctuate with production, so businesses can manage them more easily. During times of low production, variable costs will decrease, making them less of a burden.
4. Why are Fixed Costs Important to Track?
Fixed costs are important because they help businesses understand the minimum expenses they must cover to stay operational, regardless of production levels.
5. Why are Variable Costs important to track?
Variable costs are crucial for understanding how production levels impact total expenses and profit margins.
6. How do Fixed Costs impact profitability?
Fixed costs can decrease per unit as production increases, which can boost profitability by lowering the overall cost per unit.
7. How do Variable Costs impact profitability?
Variable costs increase with production, so businesses need to manage them carefully to maintain profit margins.
8. How do Fixed and Variable costs influence pricing decisions?
Fixed costs must be covered to avoid losses, so they set a baseline for pricing. Variable costs affect the cost per unit and influence profit margins.
9. Which is better for a business: higher fixed costs or higher variable costs?
It depends on the business model. Higher fixed costs are manageable if production and sales are steady, while higher variable costs offer flexibility during fluctuating production levels.
10. How can a business reduce fixed and variable costs?
To reduce fixed costs, businesses can negotiate lower rent or reduce non-essential fixed expenses. To lower variable costs, they can find cheaper suppliers, improve production efficiency, or reduce wastage.
