Explain the difference between fixed and variable costs

Expert Solution

The fixed and variable costs are the two mail costs a company has when producing goods and services. The total cost of the company included both fixed and variable costs.

Fixed costs

The cost which remain fixed irrespective of volume of output are know as fixed cost. If fixed cost is to be allocated, per unit fixed cost decreases when production increases.

Examples: Rent, Salary, Insurance, Depreciation.

Fixed cost = Total cost - Variable cost

OR

Fixed cost = Contribution - Profit

Variable costs

The cost which vary on the basis of volume of output are know as variable cost. Per unit variable cost remains the same at any given volume of output. Total variable cost increases with the increase in volume of output.

Examples: Material consumed, wages, incentive, packaging expense.

Variable cost = Total cost - Fixed cost

OR

Variable cost = Sales - Contribution

Please find the below differences between Fixed and Variable costs

Fixed cost is a cost that remain same regardles of volume of production while variable cost changes with the level of production.
Variable cost remain same per unit while fixed cost per unit changes
Fixed cost is a time related while variable cost is volume related.
Fixed cost are required to pay whether there is production or not. Variable cost only occurred whent there is production.
Fixed costs are called supplementary cost and variable costs are called as prime cost.

ekkarill92 answered 1 year ago

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