Running a business requires commitment and responsibility, as well as a lot of knowledge of the product, target audience and administrative routines. Knowing the expenses and checking the profit is essential, but knowing how to differentiate fixed and variable costs is also important. In this article we will provide you the difference between fixed and variable cost.
After all, having a company is more than producing or offering services. Keeping the business running is what will bring success, self-sustainability and a return for the owner. Therefore, it is essential to understand economics and accounting. Knowing well what is cost and expense is what will dictate the potential of your business.
With this information, you will be able to price your products and maintain the health of your expense management. To understand the difference between fixed and variable costs, know how to recognize them in your routine and, from there, check the profit, follow the exclusive content that we have prepared for you.
Fixed cost
What is fixed cost? Basically, it is everything that does not depend on the production of a company. These are expenses that do not vary from month to month, even with high, low or zero production. This concept applies to both micro and large companies — after all, they need financial organization to stay on their feet.
We can cite as examples of fixed costs those monthly expenses that, even if corrected annually, remain fixed in your spreadsheet. This list includes rent, employee payroll, entrepreneur (and partners, if any), maintenance of equipment and security.
A well-run business keeps fixed costs low to focus on production and, consequently, increase profit. From the moment that this cost gets higher, the entrepreneur needs to find out the reason to solve this problem.
Variable cost
And what is variable cost ? Unlike fixed cost, variable cost is not regular. It can change from month to month depending on production, sales volume or hours worked.
Thus, it can be overtime payments from your team, commission, raw material or electricity, for example. That is, to increase the production of a given product, you need more raw material. This is considered a variable cost.
Comparison chart
| Basis for Comparison | Fixed cost | Variable cost |
|---|---|---|
| Meaning | The cost that remains the same, regardless of the volume produced, is known as fixed cost. | The cost that changes with the change in production is considered as a variable cost. |
| Nature | Related Time | Related Volume |
| incurred when | Fixed costs are defined, they are incurred whether the units are produced or not. | Variable costs are incurred only when units are produced. |
| Unit cost | Fixed cost changes in the unit, that is, as the units produced increase, the fixed cost per unit decreases and vice versa, so the fixed cost per unit is inversely proportional to the number of production produced. | The variable cost remains the same, per unit. |
| Behavior | It remains constant for a certain period of time. | It changes with the change in output level. |
| combination of | Fixed production overhead, fixed administration overhead, and fixed sales and distribution overhead. | Direct Material, Direct Labor, Direct Expenses, Variable Production Overhead, Variable Survival and Distribution. |
| Examples | Depreciation, rent, work accidents with sick leave, and unpaid leave for personal matters. In the latter case, the firm may cut the employee’s salary, insurance, tax, etc. | Consumed Material, Salaries, Sales Commission, Packing Expenses, etc. |
