What is the difference between fixed and variable costs?


Quick Answer

Fixed costs are business expenses that do not fluctuate in line with changes in production levels or sales volumes, while variable costs are expenses that fluctuate directly and in proportion to changes in production and sales. Although fixed costs do not vary with activity, they may change over time.

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Full Answer

Fixed costs include rent, loan payments, management salaries and insurance. Expenses incurred through transportation, raw material purchases, sales commissions and hourly wages are variable costs. Fixed costs may change in relation to factors such as seasonal changes and price fluctuations.

As production volume increases, total variable costs increase proportionally, and fixed costs per unit decline. Total fixed costs and variable costs per unit remain the same.

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