Editing Differences between Fixed cost and Variable cost

== Fixed cost and variable cost ==

In accounting and economics, the two major components of a business's '''total cost''' are fixed costs and variable costs.<ref name="ref1" /> '''Fixed costs''' are expenses that do not change in relation to the volume of goods or services a company produces over a specific period. In contrast, '''variable costs''' are expenses that fluctuate in direct proportion to production output.<ref name="ref2" /> Understanding the distinction between these cost types is a component of cost-volume-profit analysis and can inform a company's pricing, production, and profitability decisions.<ref name="ref3" /> The sum of a company's total fixed costs and total variable costs is equal to its total cost.<ref name="ref4" />

=== Comparison table ===
{| class="wikitable"
|-
! Category !! Fixed cost !! Variable cost
|-
| '''Definition'''
| An expense that remains constant regardless of production volume.<ref name="ref5" />
| An expense that changes in proportion to production volume.
|-
| '''Relation to production'''
| Independent of output. A company incurs these costs even with zero production.
| Directly dependent on output. These costs are zero if production is zero.
|-
| '''Cost per unit'''
| Decreases as production increases because the total fixed cost is spread over more units.
| Remains constant for each unit produced.
|-
| '''Examples'''
| Rent, insurance, property taxes, salaries of administrative staff, and depreciation of equipment.
| Raw materials, direct labor, sales commissions, packaging, and utilities tied to production.
|-
| '''Time horizon'''
| Costs are considered fixed only in the short run.
| In the long run, all costs are considered variable as contracts can be renegotiated and assets can be sold or acquired.<ref name="ref1" />
|-
| '''Business risk'''
| Presents higher risk during periods of low sales, as the cost must be paid regardless of revenue.
| Presents lower risk, as the cost decreases when production and sales fall.
|}

[[File:Venn_diagram_Differences_between_Fixed_cost_versus_Variable_cost_comparison.png|thumb|center|800px|alt=Venn diagram for Differences between Fixed cost and Variable cost|Venn diagram comparing Differences between Fixed cost and Variable cost]]


=== Semi-variable costs ===

Some expenses, known as semi-variable or mixed costs, contain both fixed and variable components. These costs include a baseline fixed expense that is incurred regardless of activity, and a variable component that changes with the level of production. A common example is a utility bill, which may include a fixed monthly service charge plus a variable charge based on the amount of electricity consumed during production activities. Another example is the salary of a salesperson who earns a fixed base salary plus a variable commission based on sales volume.


== References ==
<references>
<ref name="ref1">[https://en.wikipedia.org/wiki/Total_cost "wikipedia.org"]. Retrieved January 29, 2026.</ref>
<ref name="ref2">[https://en.wikipedia.org/wiki/Fixed_cost "wikipedia.org"]. Retrieved January 29, 2026.</ref>
<ref name="ref3">[https://en.wikipedia.org/wiki/Variable_cost "wikipedia.org"]. Retrieved January 29, 2026.</ref>
<ref name="ref4">[https://www.blockadvisors.com/resource-center/finance/variable-costs/ "blockadvisors.com"]. Retrieved January 29, 2026.</ref>
<ref name="ref5">[https://corporatefinanceinstitute.com/resources/accounting/fixed-and-variable-costs/ "corporatefinanceinstitute.com"]. Retrieved January 29, 2026.</ref>
</references>

[[Category:Comparisons]]