Fixed Cost
Fixed Costs are expenses that do not change with the level of production or sales. These costs remain constant regardless of the business's activity level. Example: Rent for office space. Whether a company produces 100 units or 10,000 units, the rent remains the same.
Variable cost
Variable Costs are expenses that vary directly with the level of production or sales. These costs increase as production increases and decrease as production decreases. Example: Raw materials. The more products a company manufactures, the more raw materials it needs to purchase, increasing the total cost.
| Fixed Cost Examples | Variable Cost Examples |
|---|---|
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Fixed cost vs. Variable cost
| Fixed Costs | Variable Costs |
|---|---|
| These costs remain constant regardless of the level of production or sales. They do not fluctuate with changes in business activity. | These costs vary directly with the level of production or sales. They increase as production increases and decrease as production decreases. |
| These costs are predictable and easier to budget for since they remain constant over a specific period. | These costs are less predictable as they fluctuate with production levels and sales volume. |
Multiple Choice Questions
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Which of the following is an example of a fixed cost?
A) Raw materials
B) Direct labor
C) Rent
D) Packaging costs
Explanation: Rent is a fixed cost because it remains constant regardless of the level of production.
Which cost varies directly with the level of production?
A) Fixed cost
B) Overhead cost
C) Variable cost
D) Sunk cost
Explanation: Variable costs change directly with the level of production, such as raw materials and direct labor.
Which of the following is NOT a fixed cost?
A) Salaries of permanent staff
B) Depreciation on machinery
C) Utility bills varying with usage
D) Insurance premium
Explanation: Utility bills that vary with usage are not fixed costs, as they change based on the level of consumption.
Variable costs are typically associated with:
A) Administrative expenses
B) Direct production expenses
C) Long-term leases
D) Loan interest payments
Explanation: Variable costs are directly related to production levels, such as direct materials and labor costs.
Which of these costs remains the same regardless of the production level?
A) Direct labor
B) Raw materials
C) Rent
D) Shipping costs
Explanation: Rent remains the same regardless of the production level, making it a fixed cost.
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