Difference between Fixed Cost vs Variable Cost
The following article provides an outline for Fixed cost vs Variable cost. The major difference between these two costs is that the Variable depends on the output of production while the fixed cost is independent of the output.
What is Fixed Cost?
Fixed cost is defined as a cost that does not change its value with any change (Increase or Decrease) in the goods produced or services sold. Changes in activity levels do not affect fixed costs. It does not mean that the cost will remain fixed forever. It means it will be constant for a particular period of time. E.g., The interest amount charged is fixed for the period unless and until it has been renewed. Fixed cost and variable cost are the main two pillars in any industry’s production and service line. There are two types of fixed costs: Committed fixed cost and discretionary fixed cost. The fixed cost can be considered as a sunk cost.
What is Variable Cost?
Variable cost changes its value with the change in production. Variable cost increases with the increase in the unit of production and decreases if the units of production go down. Variable cost is different depending upon the type of industry, e.g., phone manufacturing and car manufacturing may have a different set of variable costs associated with them because the output achieved in both cases is different. Variable cost remains constant per unit but can change on a totality basis. i.e. Unit variable cost is Rs 5, and the production is 100,200,300 units in the following months. So, the variable cost per unit is fixed, i.e. Rs5, but the total variable cost per month is (5*100
=Rs 500) (5*200=Rs 1000) (5*300=Rs 1500).
There are two types of variable cost: Direct variable cost and indirect variable cost. Some companies also give semi-variable cost that is in between fixed cost and variable cost. e.g. electricity is a semi-variable cost. It depends on the unit of electricity consumed, but a fixed proportion of the amount is also charged if nothing is consumed.
Head to Head Comparison Between Fixed Cost vs Variable Cost (Infographics)
Below are the top 8 differences between Fixed cost and Variable Cost:
Key Differences between Fixed Cost vs Variable Cost
Let us discuss some of the major key differences between Fixed Cost and Variable Cost:
- Examples of variable costs are Raw materials, labor, packaging, freight, and commission. As the volume increases, these costs will increase as one extra item to be produced requires more materials, labor, etc. Hence these costs are directly proportional to the volume of items produced.
- Examples of fixed costs are rental payments, depreciation, insurance, interest payment, etc. These items do not change even if you increase the volume of production, e.g., even if you produce one extra item, the rental payment needs to do is the same So, Fixed cost.
- Variable cost varies with the variation in the volume production. The fixed cost has no relation with the output capacity.
- Fixed cost does not change with the volume and remains constant for a given period of time. e.g. Till the time new lease contract is not changed, the lease payment will remain fixed. Variable cost changes with the production volume.
- Example of calculating the fixed cost: Supposes the total cost is Rs1000 and the total units produced are 10. Therefore, the fixed cost per unit is Rs1000/10 = Rs100. The variable cost of labor charges is 5Rs per unit of production. Therefore, for making 10 units, it would be 10*5=Rs50. The total cost of production is the sum of the total variable cost and total fixed cost.
- Here the only taken variable is labor. We need to consider the variable cost for all the other items and add to the fixed cost to get the total cost as an outcome. fixed cost changes per unit. As the number of units increases, the fixed cost per unit decreases. Variable cost remains constant per unit. Variable cost is directly proportional to the change in production.
- If production increases, i.e., if the number of units produced increases, the fixed cost per unit produced drops significantly, increasing the possibility of a greater profit margin and achieving economies of scale.
- As mentioned above, the economies of scale production need to be increased to decrease the per-unit fixed cost. So, the risk associated with the fixed cost is higher than the variable cost.
- Unless and until production takes place, variable cost does not take place, but fixed cost occurs even if there is no production. For e.g. Even if there is no laptop produced in the laptop factory but the rental charges need to be paid – that is the fixed cost. The labor charges are not paid as no production – that is the variable cost. The fixed cost cannot be controlled and has to be paid. The amount of the production level can control the variable cost.
Comparison Table between Fixed Cost vs Variable Cost
Let’s discuss the top comparison between Fixed Cost vs Variable Cost:
|Basis of Comparison||Fixed Cost||Variable Cost|
|Definition||The cost is fixed.||Cost is variable.|
|Dependent||Independent on the volume of production of a company.||Dependent on the volume of production of a company.|
|Behavior||Remains constant for a given time. Time-related.||Changes with the output level. Volume-related.|
|Formula||It is calculated as the total fixed cost divided by no of units produced.||Formula to calculate the total variable cost is (variable cost of one item*no of items produced).|
|Economies of scale||Greater the fixed cost company has more sales the company targets to reach the breakeven point.||Variable cost remains flat in nature.|
|Risk associated||It is riskier as the cost depends on the production level.||Risk varies as the cost is dependent on the amount produced.|
|Occurred when||These costs occur even if the quantity is produced or not. It cannot be controlled.||These costs occur only when the production starts depending directly on the no of units produced. It could be controlled.|
|Examples||Salary, tax, depreciation, insurance, etc.||Cost of goods sold, administrative and general expenses on the Income statement.|
Variable and fixed costs are completely contradictory to each other but serve a major role in financial analysis. Higher units of production increase profitability as the total fixed cost decreases, while variable cost helps in the contribution margin; therefore, both have unique importance in their ways.
This is a guide to Fixed cost vs Variable cost. Here we discussed the Fixed vs Variable cost key differences with infographics and a comparison table. You can also go through our other suggested articles to learn more –