Fixed and Variable Costs

There are two main types of costs – fixed and variable.  If something is being manufactured, it consists of both fixed and variable costs.  Fixed costs are those that do not change based on a quantity.  This means the cost is fixed if you produce 1 or 1000 pieces.  Some of these costs would be security, taxes, insurance, and administration costs.   These costs are called Fixed because they do not vary with the quantity being manufactured or the level of production.  Variable costs do vary based on quantity and level of production.  Some examples of variable costs are direct material and direct labor costs.

There is a third category of fixed and variable costs which is often referred to as “mixed” costs.  Mixed costs are simple costs that are part variable and part fixed.  An example would be a heating oil or gas; there is a fixed amount that would be used regardless of if the machines are running just to keep the building warm.  The variable costs would be the amount of oil consumed by the machine.

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