FIXED AND VARIABLE COST

FIXED AND VARIABLE COST

VARIABLE COST:

By definition , variable cost change as the quantity of output changes and they are zero when production is zero. For example, direct labour cost and raw material costs are usually considered variable.

This makes sense because if we shut down operations tomorrow, there will be no future cost for labour or raw materials. We will simply assume that variable costs are a constant amount per unit of output .

FIXED COST:
Fixed cost by definition do not change during a specific time period. So , unlike variable costs , they do not depend on the amount of goods or services produced during a period.

For example, the lease payment on a production facility is a fixed cost, at least over some period .

Naturally, fixed costs are not fixed forever. They are only fixed during some particular time, say a quarter or a year.

Beyond that time, leases can be terminated. More to the point, fixed cost can be modified or eliminated given enough time; so in the long run, all cost are variable.