hey everybody i am surbhi and you are watching key differences in today's video we will talk about the difference between fixed cost and variable cost so friends without further ado let's get started what is fixed cost fixed cost are those costs that do not change with the change in output so they are incurred irrespective of the amount of goods produced these costs accrues in relation to the passage of time and up to a certain extent it remains unaffected by the changes in the activity level this means that fixed cost is incurred for a period and so it remains unaffected by the temporary fluctuations in the activity level in the short run so here you must note that the application of fixed cost cannot be changed in the short period now you must be wondering what does the term short period means here so short period is a period that is too short to change the application of fixed factors of production since these factors of production are purchased before the production actually starts therefore fixed cost is concerned with such inputs that does not change with the change in the volume of output within a relevant range now what is relevant range relevant range means fixed cost remains fixed only in relation to a given range of output and for a given span of time so if the output increases beyond that particular range fixed cost will increase so these cost remains constant in total amount over the relevant range of activity for a specified period of time however fixed cost per unit decreases when production volume increases and vice versa so let us understand this with an example in the table given here as you can see total fixed cost is constant at rs 5000 whereas average fixed cost per unit tends to decrease with the increase in the production volume so fixed cost remains constant on an aggregative basis as you can see in the figure depicted here however fixed cost is variable on unit basis because there is an inverse relationship between the production volume and fixed cost per unit which you can see in the figure here further the line representing fixed cost per unit will not touch the x-axis because fixed cost per unit can not be zero example of fixed cost are expenditure on plant and machinery rent of land and building license fee wages and salaries of permanent staff insurance of factory building etc what is variable cost variable cost are those costs that vary directly and proportionately with the quantity of output produced that is as the activity level increases so does the total variable cost and vice versa however variable cost per unit remains fixed this is because it is the cost of elements which is directly affected by the change in the production volume so we can say that variable cost follows the activity level hence it is in one to one relationship with the production level majorly it is divided into two parts variable direct cost and variable indirect cost variable indirect cost is nothing but the variable overheads further let us understand the concept of variable cost with an example in the table given here as the firm produces 5 unit of products it cost rs 15 to the firm and as the output increases so does the variable cost in the same proportion as you can see in the figure so the relationship between the volume of output and total variable cost is continuous and linear that is straight line is formed when plotted on a graph in this way total variable cost vary in total direct proportion to the volume and resultantly they are constant per unit of volume thus it is a cost that fluctuates in total amount but remains constant per unit as the production level changes examples of variable cost are cost of raw material labor electricity bill commission shipping cost transportation cost etc moving on to the difference between fixed cost and variable cost meaning fixed cost is the cost that do not change with the change in output up to a relevant range in the short period variable cost refers to the cost that changes in the same proportion of the quantity produced next fixed cost mainly depends on the reflection of time and so it is time related whereas variable cost is directly affected by the volume of production and so it is volume related in currents the incurrence of fixed cost is certain that is it is incurred even when no units are produced by the firm on the other hand variable cost is incurred only when units are produced by the firm behavior while fixed cost remains constant for a certain period variable cost changes with the change in the output level next if you are going to see the overall impact fixed cost changes per unit that is as the production level increases fixed cost per unit decreases on the contrary variable cost remains constant per unit look at another way total fixed cost remains constant irrespective of the level of output whereas variable cost changes in total that is as the level of activity increases so does the total variable cost next fixed cost can never be zero even when the production is stopped as against variable cost can be zero when the production stops further while fixed cost is incurred on the fixed factors of production that is machinery building etc variable cost is incurred on variable factors of production like material labor transport etc next production at loss the firm can continue production even at the loss of fixed cost but the firm may not continue production at the loss of variable cost so friends this brings me to the end of this lesson i hope the difference is clear to you now however if you want to study the topic further in detail you can visit our official website that is keydeferences.com here you can find a detailed comparison of fixed cost and variable cost along with their definitions and diagrams links are also provided in the description box below i hope you liked this video and if you did please do give it a thumbs up and share it with your friends also if you are new to this channel and wanna get more such useful videos consider subscribing this channel and also hit the notification bell next to the subscribe button so that you are notified every time whenever a new video is uploaded on this channel and if you have any queries or feedback for me feel free to leave in the comment section below until next time this is me subbi signing off