Fix and Variable Cost are broadly used economic terms that often panic economic students. This is a straightforward concept if people elaborate on them with examples.
As their names imply, fixed cost is a Cost that remains constant during a particular period. Conversely, variable cost changes during specific course duration. Despite this main difference, there are also many other differences between them. Let us discuss them with some examples.
What is Fix Cost?
Fix Cost is that expense that remains constant during a specific period. The concept of fixed cost is applicable only in the short run, where variable Cost is the only Variable. Fix Cost always remains constant despite some exceptions.
The value of fixed cost is independent of the production of units. As its name implies, whether the firm is operating at total capacity remains fixed. Fix costs include rent, salaries, FOH, permanent labor, transfer funds, mutual funds, etc. The changes in fixed costs can adversely affect the output of a firm. Estimating fixed costs is the primary factor that companies consider to determine the industry’s future.
What is Variable Cost?
Variable Cost is that part of total Cost that depends upon the production level. As the production of a firm increase, variable cost increase or vice versa. The change in variable Cost often determines the growth level of a firm. The prime example of Variable Cost is raw material and temporary labor.
Firms can control this part of Cost by increasing or decreasing their output. The variation in the variable Cost is directly proportional to the output level. Business people keenly focus on variable Costs, co-linked with their profit function.
Key differences between Fix Cost and Variable Cost:
- Fix Cost is that part of the total independent of the output level, while Variable Cost is directly related to the output level.
- Fix Cost is the expense of fixed factors; meanwhile, Variable Cost is the expense of variable factors.
- Fix Cost is easier to predict as compared to Variable Cost.
- Fix Cost does not depend on production, while Variable Cost depends on the output.
- Fix Cost is also known as supplementary Cost, while Variable Cost is known as prime Cost.
- Fix Cost can never be zero even at no production, while Variable Cost may become zero at zero production level.
|Feature||Fix Cost||Variable Cost|
|Change with production||No||Yes|
|Link with production||Independent||Direct|
|Another name||Supplementary Cost||Prime Cost|
|Examples||Rent, Wages, FOH||Raw material, marginal production|
After this brief discussion, we can say that fixed and Variable costs are entirely different. However, both expenses add up to give the total Cost as follows: Full Cost= Fix Cost + Variable Cost