You can understand this with an example, i.e. Now, variable cost remains the same in per unit but changes in total. The Variable cost is directly proportional to the units produced by the enterprise. when there is an increase in production, the variable cost will also increase proportionately with the same percentage, and when there is no production, there will be no variable cost. Variable cost varies with the variations in the volume, i.e. They are directly affected by the fluctuations in the activity levels of the enterprise. The cost which changes with the changes in the quantity of output produced is known as Variable Cost. Now, in this situation, what you can see is, the total fixed cost is unchanged in all the three-quarters, but the unit fixed cost in the first quarter is Rs. 10000 and the output produced in the first, second and third quarters are 4000, 50 units. To explain this, we have an example If the fixed cost is Rs. This can be explained with an example, If your company is operating the business in a rented building, so whether you produce tons of output or you produce nothing, you have to pay the rent of the building, so this is a fixed expense which is constant over a period until the rent of the building increases or decreases.įixed cost will be the same in total but changes in per unit. Material Consumed, Wages, Commission on Sales, Packing Expenses, etc.įixed Costs remaining constant does not mean that they will not change in the future, but they tend to be fixed in the short run. It changes with the change in the output level.įixed Production Overhead, Fixed Administration Overhead and Fixed Selling and Distribution Overhead.ĭirect Material, Direct Labor, Direct Expenses, Variable Production Overhead, Variable Selling and Distribution Overhead.ĭepreciation, Rent, Salary, Insurance, Tax etc. It remains constant for a given period of time. as the units produced increases, fixed cost per unit decreases and vice versa, so the fixed cost per unit is inversely proportional to the number of output produced. Variable costs are incurred only when the units are produced.įixed cost changes in unit, i.e. The cost which changes with the change in output is considered as a variable cost.įixed costs are definite, they are incurred whether the units are produced or not. The cost which remains same, regardless of the volume produced, is known as fixed cost. So, read the given article in which we have compiled all the important points of distinction in tabular form and examples. While working on production costs, one should know the difference between fixed and variable costs. Conversely, Variable cost refers to the cost of elements, which tends to change with the change in the level of activity. Fixed costs are one that does not change with the change in activity level in the short run. Many cost accounting students are not able to bifurcate fixed and variable costs.
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