This cost is a cost which has elements of both fixed cost as well as the variable cost.
Some of the examples of variable cost are direct expenses, direct labour, direct material etc. Hence we can say that the cost which changes in the same proportion as the units produced, is the variable cost. Thus we see that the variable costs are those costs which vary directly in proportion to change in the volume of production/output. For example, with massage therapy, oil may be used and there may be the cost of laundering one or two towels. Similarly, in other businesses, the variable cost will be determined by the raw materials and the output of the business. For example, a variable cost for a bakery would be the cost of the flour. Therefore, as sales increase the variable costs will increase. In other words, we say that a variable cost varies in exactly the same proportion as the output varies. These are the costs that vary as the total cost to the organization when the output (number of items or services produced by the unit/ business) varies. Fixed costs are usually incurred at regular intervals (for example monthly rent) so sometimes we call them the period costs. Similarly, another example is the property tax. This cost will not change as long as the rental agreement is valid.
For example, if you are living in a rented place, you must have negotiated the cost of the place or the rent for a term that is on the rental agreement. We can understand the fixed cost with the help of many examples. The value of fixed cost determines the cost of the product and thus the profit and loss incurred by the business. This cost is usually a constant cost for a basic operation of businesses or in other words it is a basic operating cost of a business which is crucial and can’t be avoided. Variable Cost, Semi-Variable and Fixed Cost Fixed CostĪ cost that doesn’t change in a short term, irrespective of how the volume of production or the sales may change is the fixed cost.
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