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. 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. 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. The sum of a company's total fixed costs and total variable costs is equal to its total cost.

Comparison table

Category	Fixed cost	Variable cost
Definition	An expense that remains constant regardless of production volume.	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.
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.

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.