Key Differences between Fixed Cost and Variable Cost

Introduction

• Presenter: Surbhi from Key Differences
• Topic: Difference between fixed cost and variable cost

Fixed Cost

• Definition: Costs that do not change with the change in output.
• Characteristics:
  • Incurred irrespective of the amount of goods produced.
  • Accrue over time and remain unaffected by temporary activity level changes in the short run.
  • Cannot be changed in the short period, which is too short to alter fixed factors of production.
  • Related to inputs that do not change with output volume within a relevant range.
• Relevant Range:
  • Fixed cost remains unchanged only within a specific output range and time span.
  • Beyond a certain output range, fixed costs increase.
• Behavior:
  • Constant in total amount over a relevant range for a specified period.
  • Per unit fixed cost decreases with increased production volume.
• Example: Total fixed cost constant at Rs 5000, with average fixed cost decreasing as production increases.
• Examples of Fixed Costs:
  • Plant and machinery expenditure
  • Rent of land and building
  • License fee
  • Wages and salaries of permanent staff
  • Insurance of factory building

Variable Cost

• Definition: Costs that vary directly and proportionately with output quantity.
• Characteristics:
  • Total variable cost increases with activity level and decreases when it falls.
  • Variable cost per unit remains constant.
  • Follows activity level, in direct relation to production level.
• Types:
  • Variable direct cost
  • Variable indirect cost (variable overheads)
• Behavior:
  • Linear relationship with output volume.
  • Constant per unit cost despite changes in production level.
• Examples of Variable Costs:
  • Cost of raw materials
  • Labor
  • Electricity bill
  • Commission
  • Shipping and transportation costs

Differences Between Fixed Cost and Variable Cost

• Meaning:
  • Fixed cost: Unchanged with output change within a relevant range in the short period.
  • Variable cost: Changes in the same proportion as quantity produced.
• Nature:
  • Fixed cost: Time-related.
  • Variable cost: Volume-related.
• Incurrence:
  • Fixed cost: Incurred even if no units are produced.
  • Variable cost: Incurred only when units are produced.
• Behavior:
  • Fixed cost: Constant over time.
  • Variable cost: Changes with output level.
• Impact on Cost Per Unit:
  • Fixed cost: Decreases per unit with increased production.
  • Variable cost: Constant per unit.
• Total Cost Behavior:
  • Total fixed cost: Constant regardless of output level.
  • Total variable cost: Changes with activity level.
• Zero Cost Possibility:
  • Fixed cost: Never zero, even if production stops.
  • Variable cost: Can be zero if production stops.
• Production at Loss:
  • Fixed cost: Production can continue at a loss of fixed cost.
  • Variable cost: Production may not continue at a loss of variable cost.

Conclusion

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