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What are the differences between fixed and variable costs?

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Quick Answer

The difference between fixed and variable costs is that fixed costs are constant and are not affected by daily needs or volume, whereas variable costs have a direct relationship with daily activity and expenses, explains Accounting Tools. Mixed costs are expenses that contain elements of both variable and fixed costs.

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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 primarily consist of expenses related to insurance, rent, salaries, utilities and depreciation. Variable costs include day-to-day costs and expenses that are not consistent or routine, such as sales commissions, direct materials and credit card fees.

Fixed expenses are not always as consistent as the name suggests, explains About.com. Rent and mortgage costs do not commonly change, but utilities, insurance costs and depreciation rates may change slightly from one month to the next. Businesses that reduce fixed costs save money in the long term and experience higher profit margins from sales when the overhead is lower.

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.

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