Hi, my name is Nancy, and today I am going to continue our cost accounting series by explaining the difference between fixed costs and variable expenses.
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Now the next costs we will look at are variable and fixed. A variable cost will change proportionately with the volume produced. So, if a company sells 20% more products, then their variable costs will increase by the same percentage. An example would be the cost of car tires. The number of car tires needed will depend on the number of cars produced. So, if the manufacturer increases the production of vehicles by 20%, then the number of tires would increase by 20%. Next up is fixed costs.
Fixed costs stay fixed until the business grows beyond another higher relevant range. An example would be the office rent. This cost would not change unless the office space were increased or decreased. Other examples would be utilities, salaries interest expense, or depreciation expense.
To summarize, the difference between fixed and variable expenses can impact your business. The more fixed expenses you have, the more revenue you need to generate to break even. Remember that fixed costs stay consistent until the business grows beyond another higher relevant range, whereas variable expenses fluctuate depending on the number of products produced.