What are fixed costs and variable costs?

Fixed costs and variable costs are two types of expenses that businesses incur in their operations.

Fixed costs are expenses that do not change with the level of production or sales. They are constant and remain the same regardless of the volume of output or sales revenue. Examples of fixed costs include rent, salaries, insurance premiums, and property taxes. Fixed costs are often considered sunk costs as they cannot be avoided in the short term.

Variable costs, on the other hand, are expenses that vary with the level of production or sales. They increase or decrease as the level of output or sales volume changes. Examples of variable costs include direct materials, direct labor, and utilities. Variable costs are directly tied to the production of goods or services and are avoidable if no production takes place.

It is important for businesses to distinguish between fixed and variable costs, as it can help them make decisions about pricing, production levels, and profitability. Understanding fixed and variable costs allows businesses to identify the costs associated with producing their products or services and helps them to determine the minimum level of sales required to break even.