Variable Costs vs. Fixed Costs
Basis | Variable Costs | Fixed Costs |
---|---|---|
Definition | Costs that vary directly with production volume. | Costs that remain constant no matter the production. |
Examples | Direct materials, Direct labor, Variable manufacturing costs, Variable selling and distribution costs. | Rent, Salaries, Loan payments, Insurance premiums, Depreciation. |
Behavior | Increases or decreases as the number of products increases or decreases. | Stay constant over a specific period of time (e.g., month, year). It may be a long-term modification (e.g., a new lease). |
Control | Management can influence variable costs by optimizing production, negotiating with suppliers, and maintaining inventory. | In the short run, companies have little control over fixed costs. Long-term implementation may require renegotiation of contracts, outsourcing, or major facility changes. |
Planning and Budgeting | It is easy to calculate based on the number of resources used. | Careful planning and sharing is important because it remains consistent regardless of production volume. |
Implication on Decision-Making | Important for decisions regarding production, outsourcing, and pricing strategies. | It is important for long-term planning, resources allocation and budgeting. |