In Professional terms, The cost is the monetary worth of all costs a corporation incurred in the production of items or services. To calculate the cost of the product or services there are different types of the cost of which fixed cost and variable cost are one of them.
Fixed and variable are the two costs that exist in an enterprise. The fundamental difference between fixed cost and variable cost is that fixed cost relates to the expenditure on constant production components and variable costs to the cost of variable production factors.
What is a Fixed cost?
Fixed costs of a corporation do not vary with output volumes. Whether goods or services are produced or not, fixed costs stay the same. A corporation cannot, therefore, avoid fixed costs.
The formula of fixed cost:
Total fixed cost = Total cost of production – variable cost per unit ✕ No. of units produced
Average Fixed cost = Total fixed cost / Total No. of Units
What is a Variable cost?
In contrast to Fixed cost, Variable cost relates to the amount of the expenses of products or services that a company generates. With their production volume, the variable costs of a corporation increase and drop. The variable costs will grow if the manufacturing volume gets up. If the volume decrease, the variable expenses will also decrease.
The formula of Variable cost:
Total Variable cost = Quantity of output ✕ Variable cost per unit of output
Average Variable cost = Total variable cost / Output
Difference Between Fixed cost and Variable cost
The following are the differences between fixed cost and variable cost:
| Fixed cost | Variable cost |
|---|---|
| Meaning | |
| Fixed cost is the remaining cost which is known as a fixed cost irrespective of the volume generated. | Variable costs are the costs that are seen as variable costs by variations in output. |
| Nature of Output | |
| These are the costs that are independent of output. | These are the costs that vary with the level of output. |
| Level of output | |
| Cost exist or arise, even at zero levels of output | Cost becomes zero at zero levels of output |
| Period | |
| Fixed costs are found only in a short period. | Whereas, variable cost is seen in the short and long periods. |
| Is also called as | |
| Fixed costs are supplement costs | Variable costs are called prime costs. |
| Examples | |
| Salaries, Wages of permanent staff, Rent of fixed assets, etc; | Wages, Transportation costs, Raw material costs, etc; |
Bottom line:
As a result of the preceding discussion, Both costs stand for every business. The distinction between these two is the consistency and stability of costs over time and levels of production.
