Q:

What is the difference between fixed and variable costs?

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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

Accounting practices use fixed and variable costs to determine the nature of an expense and assist managers with budgeting to ensure sales cover at least the amount of fixed costs, according to Accounting Tools. 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.

Variable costs are often considered discretionary, according to About.com. Alterations to variable costs, which may include such expenses as entertaining clients at restaurants, paying for periodic delivery services or distributing holiday bonuses, can also save money. Businesses that seek to reduce spending are often able to cut from variable costs more easily than from their fixed expenses.

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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