The main difference between fixed cost and variable cost is that fixed cost is a cost that remains fixed throughout the production period irrespective of the level of production. Variable cost is those costs that vary according to the level of production. In the case of low production, it will be low and vice versa.
According to variability, the costs have been classified into three classes, that are variable, fixed and semi-fixed variable. Fixed costs are fixed in total, no matter the amount of output produced. Variable costs vary with the amount of output produced. Semi-variable is the form of costs, which have the features of both fixed costs and variable costs.
Many cost accounting students aren’t able to bifurcate fixed and variable cost. Fixed costs are one which doesn’t change with the shift in an amount in the short run. While, Variable cost is the cost of components, which will change with the change in the level of activity. While working on costs of production, an individual needs to understand the difference between fixed cost and variable cost. Have a read of the article where we’ve compiled all of the points of differentiation.
Contents: Difference between Fixed Cost and Variable Cost
|BASIS||FIXED COST||VARIABLE COST|
|Definition||The cost which stays the same, regardless of the volume generated, is called fixed cost.||The cost which varies with the change in output is regarded as a variable cost.|
|Character||Time Connected||Volume Connected|
|Incurred if||Fixed costs are certain; they are incurred if the components are created or not.||Variable costs are incurred only when the components are made.|
|Unit Cost||Fixed cost changes in the unit, i.e. as the units produced increases, fixed cost per unit declines and vice versa, so the fixed cost per unit is inversely proportional to the amount of output produced.||The variable cost stays the same, per unit.|
|Behavior||It stays constant for a given time.||It changes with the change in the output level.|
|Blend of||Fixed Production Overhead, Fixed Administration Overhead and Fixed Selling and Distribution Overhead.||Direct Material, Direct Labor, Direct Expenditures, Variable Manufacturing Overhead, Variable Selling, and Distribution Overhead.|
|Cases||Depreciation, Rent, Salary, Insurance, Tax etc..||Material Consumed, Wages, Commission on Sales, Packing Expenses, etc..|
What is a Fixed Cost?
A fixed cost is a cost incurred by companies and corporations. Contrary to the variable cost, a provider’s fixed cost doesn’t vary with the quantity of production. It stays the same if no goods or services are produced, and can’t be avoided.
Using the example above, assume company ABC has a fixed cost of $10,000 a month. If the company doesn’t create any mugs, it would need to pay $10,000 for the cost of leasing the machine. If one million mugs are produced by it, its fixed cost is still the same. The variable costs change to $2 million.
The more fixed costs a business has, the more earnings a company needs to be able to break even, so it needs to work to produce and promote its own products. That is because these costs change and occur.
The most frequent examples of fixed costs include insurance, utilities, lease, and rental payments, certain wages, and interest payments.
While variable costs tend to remain flat, the effects of fixed costs on a corporation’s bottom line can change depending on the amount. So, when production increases, the fixed cost drops. A higher volume of goods’ purchase price can be spread across exactly the quantity of a fixed cost. A business can, therefore, achieve economies of scale.
By way of instance, ABC has a rental of $10,000 per month on its manufacturing facility and it generates 1,000 mugs per month. It may spread the fixed cost of this rental. If it makes 10,000 mugs the fixed cost of the rental goes down, to the tune of $1 per ounce.
There are two types of Fixed Cost:
- Committed Fixed Cost
- Discretionary Fixed Cost
What is Variable Cost?
A variable cost is an organization’s cost that’s associated with the number of goods or services it produces. A business’s variable cost decreases and increases with its production quantity. When manufacturing volume goes up, the variable costs increases, if the quantity goes down, so too will the variable costs.
Variable costs are different between industries. It’s not helpful to compare the variable costs between an automobile manufacturer and an appliance maker because its product output is not comparable. So it’s far better to compare the variable costs between two companies that operate in the sector, such as two automobile makers.
Variable costs can be calculated by multiplying the amount of output by the variable cost per unit of output. Assume company ABC produces mugs for the cost of a mug. If the business generates 500 units, its variable cost will be $1,000. If the company doesn’t produce any components, it won’t have any variable cost for producing the mugs. If the organization produces 1000 units, the cost will rise to $2,000. This calculation is easy and doesn’t take any costs like labor or materials.
Examples of variable costs include labor costs, utility costs, commissions, and the cost of materials which are used in manufacturing.
Key Differences between Fixed Cost and Variable Cost
- Fixed Cost is the cost that does not change with the fluctuations in the number of production units. Variable Cost is the cost which varies with the fluctuations in the number of production units.
- The Fixed cost is time-related, e. it stays constant over time. Unlike Variable Cost that’s volume related, i.e. it varies with the change in quantity.
- Fixed Cost is certain; it will incur even if there are no units are made. While, Variable Cost isn’t certain; when the business does some manufacturing, it will incur.
- Fixed cost changes in per unit. While variable cost remains constant in per unit.
- Cases of fixed cost are leased, tax, salary, depreciation, fees, duties, insurance, etc.. Examples of variable cost are packing costs, cargo, substance consumed, salary, etc..
- Fixed Cost wasn’t included at the time of valuation of the stock, but Variable Cost is included.
From the discussion, it may be evident that the two costs are contrary to one another, and they’re not the same whatsoever. While we discuss these two, there are doubts but with the following report, you are going to be fulfilled. This is for the difference between Fixed Cost and Variable Cost.