Cost is the value in terms of money that is incurred by a particular company while providing goods and services or manufacturing them. A company may consist of various types of departments or sections within it, and the Cost may be different for each expense that occurred. Cost is important in all the sectors like accounting, retail, research, and production. There are two types of Costs, i.e., Variable and Fixed Cost. There are other costs as well, like when there is a transaction, then it includes both external as well as private costs.
Fixed vs Variable Costs
The main difference between Fixed and Variable Costs is that fixed Cost means that it is a cost that remains static and the organization or the company associated has to bear the expense of fixed costs. While variable Cost is something that is defined by the production that a particular company makes. Fixed Cost remains the same or fixed. But it can change after a certain period. While variable costs depend upon the variable of production. It increases and decreases based on the production of the company.
Fixed Costs are also called Overhead or Indirect costs. It remains fixed and doesn’t depend upon the expenses of goods and services. It is incurred by a company or business. Fixed costs are recurring, which means it has to be paid in a fixed amount. Examples include paying the rent every month to the landlord. Or a bakery paying the phone bill and monthly rent etc. Fixed costs sometimes become a barrier also for new entrepreneurs in businesses because the amount is sometimes huge to pay. It is not fixed permanently and can change over a certain time.
Variable Costs change depending upon the units produced in an enterprise. It changes according to the goods and services produced by a company or business. Sum of all marginal costs produced in a business makes variable costs. In total, cost variable costs play an important role. Variable cots can be called direct costs. However, not all direct costs are variable costs. Variable costs are also called unit-level costs because they vary according to the units produced. It is influenced by various factors like duration of the project, uncertainty, fixed Cost, and discount rate.
Comparison Table Between Fixed and Variable Costs
|Parameters of Comparison||Fixed Costs||Variable Costs|
|Incurred||Definite and consistent.||Depends upon the units produced.|
|Unit Costs||Changes||Remains same|
|Combination||Fixed Administration Overhead, Fixed Selling, Fixed Production Overhead, and Distribution Overhead.||Direct Expenses, Variable Production Overhead, Direct Material, Direct Variable Selling, Labor, and Distribution Overhead.|
|Examples||Rent, Salary, Insurance, Depreciation, Tax etc.||Commission on Sales, Packing Expenses, Material Consumed, Wages, etc.|
What are Fixed Costs?
Fixed costs are temporary. The unit cost of fixed costs changes over time. But it remains fixed concerning the behaviour and quantity of production. There are no fixed costs for the longer duration because they may change into variable costs. So fixed costs are only for a short period. There are a few examples of fixed costs that cannot be reduced for a shorter period. This includes types of equipment, organization, investments in several facilities etc. Such types of costs are called Committed Fixed Costs.
Discretionary Fixed Costs are decided by the management of the company annually that can be spent on certain fixed costs. Such costs may be expensive. In economics, fixed costs are usually capital. Capital may include buying a warehouse for production, machines, unskilled labour etc., for a fixed price. A variety of things are included in the fixed costs, and all these costs may be for a shorter period and can be unexpected.
Fixed costs are called Indirect costs or Overhead costs. It acts as a barrier sometimes for the new company. In the field of marketing, it is very necessary to see that how fixed and variable costs are differentiated. Because it becomes important to forecast the earnings generated by various changing units and their impact on the marketing campaigns. In accounting, fixed costs include all the other types of costs that are not included in the goods and services of an organization.
What are Variable Costs?
Variable costs constitute all the units produced in the marginal costs. It changes depending upon the number of goods and services. Variable costs can be considered normal costs. It constitutes one of the important components in determining the total costs. Direct costs can be variables that depend upon the object of the cost. However, not all variable costs are direct. They are also called unit-level costs because they are determined by the units produced in the company.
Variable costs are influenced by different kinds of factors. It includes uncertainty, fixed cost, duration of the project, discount rate etc. In marketing, just like the fixed costs, variable costs are also important to determine the forecasting of the earning generated by different changes in the units. It also impacts the marketing campaigns. Variable costs are directly affected by the fluctuations in the company. It varies with the volume that means that if there is an increase in production, then variable costs will also increase.
If there is no production, then there will be no variable costs. It is directly proportional to the units produced. Variable costs are of two types. Direct Variable Costs and Indirect Variable Costs. It doesn’t impact the profit due to the level of production. Examples of Variable costs include the cost of labour, sales, cost of raw materials, commissions, wages, packing etc.
Main Differences Between Fixed Costs and Variable Costs
- Fixed costs are related to time. Variable costs are related to volume.
- Fixed costs are definite and consistent. These costs have to be paid regularly. Variable costs are incurred when the units are produced, and it depends upon them.
- Unit changes in fixed costs. Unit remains the same in the variable costs.
- Behaviour of Fixed costs remains constant. Variable costs change i.e. Increases or decreases.
- Combination in Fixed costs includes Fixed Administration Overhead, Fixed Selling, Fixed Production Overhead, and Distribution Overhead. Combination in variable costs includes Direct Expenses, Variable Production Overhead, Direct Material, Direct Variable Selling, Labor, and Distribution Overhead.
- Examples of fixed costs include Rent, Salary, Insurance, Depreciation, Tax etc. Examples of Variable costs include Commission on Sales, Packing Expenses, Material Consumed, Wages, etc.
Both fixed costs and variable costs are very different from each other. They are the opposites. Both are necessary to calculate the total costs. Both of them form an integral part of the fully functional enterprise, company or business. Because of fixed and variable costs, only various large and small organisations can sustain.
Both of them plays an important role in determining the distinction between the earnings generated and the total units produced. It also helps in the proposed marketing campaigns. Both of them has a financial impact on the company. Fixed costs impact the profit if there is higher production in the company while reducing the costs.