Question

Hi,

I need to distinguish between fixed costs and variable costs, but I have no idea where to even start. Could you please explain? Simple answer will suffice.

Thank you

Revenue

Total revenue

Cost of revenue

Gross profit

Operating activities

Research & development

Selling, general & administrative

Non-recurring

Other operating expenses

Total operating expenses

Operating income

Income from continuing operations

Net other income

EBIT

Interest expense

Income before tax

Income tax expense

Minority interest

Net income from continuing ops

Non-recurring events

Discontinued operations

Extraordinary items

Effect of accounting change

Other items

Net income

Net income

Income (for common shares)

Answer 1

In simple definition,
Fixed cost refers to those costs which are not dependent on units of production and they will be incurred even if there is no activity.
Variable cost is that cost which varies depending on the units produced. Higher the production volume, higher will be Variable costs and at the same time, if there are no activity, then Variable cost will also be 0
But there are also various costs which can be partly fixed and partly variable and they are called Mixed costs

From the above given list, Some costs can be categorized as follows:

Cost	Category
Cost of revenue	Variable
Research and development	Fixed
Selling, general and administrative	Variable
Other operating expenses	Mixed
Interest expense	Fixed
Income tax expense	Fixed

This is just to get an idea but the actual differentiation can be done based on details. For example, 'Cost of revenue' is mostly variable but it may also contain some fixed cost elements, or Non recurring expense is an expense which does not incur regularly but only one time and therefore it cannot be described as fixed or variable. Also, 'Other operating expense' can be Fixed, variable or mixed depending on the details. In order to determine whether an expense is FIXED or VARIABLE simply try to find the answer of one question - ' Will this expense change with the change in level of production (Variable cost) or will it remain same and will be incurred irrespective of the level of activity (Fixed cost).

(If there are any issues, doubts or questions, kindly let me know in comments. If the solution is to your satisfaction, a thumbs up would be appreciated. Thank You)