How Fixed Cost Differ from Variable Costs
Fixed costs are elements of cost that remain the same over a normal range of production activity, volume, or within a given period (Chen et al., 2015). A perfect example of a fixed cost for a business is rental remittance. A business will pay the same rent over a particular period unless the rental terms change. In addition, a business will incur fixed costs whether it engages in production or not. A company cannot avoid fixed costs by avoiding or reducing production activity. Even when the business cannot break even, fixed costs must be paid, even if it means using alternative sources (Carl & Martland, 2003). For instance, if a printing company hires a printer for $500 a month to print T-shirts, it will still pay the $500 even in a month they do not get clients. In some months, the business may get thousands of clients and earn more revenue, but the business will still pay a paltry to continue using the printer.
On the other hand, variable costs vary depending on production volume or activity (Chen et al., 2015). For instance, food costs in a fast-food restaurant will vary depending on the sales level. If sales go down, the restaurant will lower production, which means they will also spend less on food materials. It is important to pay attention to the fact that a cost may be fixed in one business but variable in another business. For instance, fuel is a fixed cost for a food truck since a company will use the same amount of fuel regardless of the amount of food it sells. On the other hand, fuel is a variable cost for a delivery company like UPS. The amount of fuel used depends on the orders packaged.
References
Carl D Martland Page, & Martland, C. D. (2003). MIT Civil Engineering 1.011 –Project Evaluation Spring Term 2003 Cost Terminology. http://web.mit.edu/1.011/www/1.011-ppt02-CostTerminology.pdf
Chen, G. G., Weikart, L. A., & Williams, D. W. (2015). Budget Tools: Financial Methods in the Public Sector. Sage.
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How Fixed Costs Differ from Variable Costs
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