Difference Between Variable Costs vs. Fixed Costs

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Primary Difference

Economics is the branch of science which deals with the factors that determine the production, distribution, and consumption of stuff that is being produced by different companies and organizations. It is about studying the human behavior in which they create a relationship between the society and the resources they have and how they use them in order to meet the demands. There are many terms which are involved in this field that can be confusing for the people who do not have much idea about economics. Some of these terms are very similar to each other while other are entirely unlike. The ones who will be discussed in this space are Variable Costs and Fixed Costs. Both are different from each other, and that can be assumed just by looking at the names. To make the variations more evident, we need to look at the definitions. In simple words, though, variable costs are the ones who change the way a company works. For example, if the expense of material were less a month ago and now it has increased, then the total amount of the product will also increase since the raw material being bought has a variable cost. On the other hand, fixed costs are the ones who stay constant throughout the whole process. They do not depend on the international market and is in the hands of the company to make sure they do not change throughout the course of time. In more complex terms, fixed costs are the ones which do not change with the change in the amount of materials that are being produced or sold. Variable costs are the ones who constantly keep on changing with the amount of material being produced or sold. The best examples of a fixed cost can include costs such as rent, electricity bill, machinery, and the buildings. The best examples of variable costs include payments made to the employees, utilities and materials that are being used. In real life, a good example can be the fact that if you phone someone, the costs are different for different networks. If you call on the same network the costs will be the same, if you give the floor to another network, it will differ. Similarly, if you use an individual package, then the total amount of money being spent will stay the same no matter which system you are calling. There are many other differences between these two languages as well which will be discussed in the end, while a brief description of both the types is given in the next couple of paragraphs.

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Comparison Chart

Variable CostsFixed Costs
DefinitionThe amount of money that is being spent in a company on different factors.the amount of money that a company has to spend irrespective of the changes that take place in the amount of people that are hired or the success of the business in producing less or more goods.
EmployeesAre the ones which change the way a company worksAre the people who stay constant throughout the whole process.
ExampleThe amount of material being bought, the wages that are being paid to the employees.Rent, machinery, buildings, advertising and insurance.
Real life situationA phone call done on different networks can be termed as a real life examplePhone call done on the same system for the same price can be termed as an example.
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Definition of Variable Cost

A variable cost is the amount of money that is being spent in a company on different factors. It is not constant and keeps on changing with the variations in the factors associated with buying and selling. They change if the company is producing less or more goods. If a company is creating more products the number of variable costs will increase since some wages are given to employees will have to be increased, and the total amount of material that has to be bought will also have to be more. If the production is less, then some variable costs will be lesser. There are many areas which can be included in the variable costs. They can be influenced by the material that is being bought, if the content requires changes, then the total amount of the company will also change. This also can have the wages that are being paid to the employees. If the company starts producing more, then they will need more workers, and invariably more money will have to be spent. Knowing that the product is being produced more, the packaging costs will then also become more since all the things have to be sent to the market in the best possible scenario.

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Definition of Fixed Costs

A fixed cost is the amount of money that a company has to spend irrespective of the changes that take place in the amount of people that are hired or the success of the business in producing less or more goods. Many factors can be considered as a fixed cost, but the main ones are rent, machinery, buildings, advertising and insurance. It does not change with the increase or decrease in the amount of goods being sold in the market. The amount has to be paid no matter what the situation is. If you have a building that is on rent for a company, then you will have to pay the rent as per signed the agreement. If is an operating expense that cannot be avoided. They are usually broken down into different factors to analyze how the company is progressing. Changes cannot be made in these costs until some major problem arises. The total spending of a company has a big part of fixed costs while a smaller amount of variable expenses. Different analysis has to be done in order to decide if a spending can be termed as fixed or variable and the best example of it can be the insurance of the employees which has to be done even if the company is producing less.

Differences in a Nutshell

  1. Variable costs are the ones who change the way a company works while fixed costs are the people who stay constant throughout the whole process.
  2. Fixed costs do not depend on the international market while a variable cost depends on the market and the changes that take place.
  3. The best examples of fixed costs include rent, machinery, buildings, advertising and insurance. The best example of variable costs involves the amount of material being bought, the wages that are being paid to the employees.
  4. A phone call done on different networks can be termed as a real life example of variable costs while the phone call done on the same system for the same price can be termed as an example of fixed cost.

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Conclusion

There are many forms of activities that can be carried out in the business industry and the two terms that have been explained here are similar, people who want to carry out their businesses and the ones who want to explore the commerce side more will find this article really helpful and get to know the differences between them.