Fixed And Variable Costs Flashcards, test questions and answers

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What is Fixed And Variable Costs?

Fixed costs are costs that do not vary with changes in the level of output produced. They remain the same regardless of how much is produced or sold and can include items such as rent, insurance, and taxes. Variable costs are costs that change depending on the level of production or sales. Examples of variable costs include raw materials, direct labor, and variable overhead expenses such as utilities or repairs.Fixed costs tend to be more predictable than variable costs because they remain consistent regardless of production levels. This makes budgeting easier since there is a greater degree of certainty regarding expenses. Fixed costs also represent sunken investments made by a business which cannot be recovered if output is reduced or stopped altogether; therefore they must be considered before any decisions are made about increasing output levels.Variable costs are more difficult to predict since they may increase or decrease depending on changes in production levels; however, they can also offer businesses greater flexibility when it comes to budgeting and decision-making. For example, if a business needs to reduce its overall spending, it can reduce its variable cost expenditures such as direct labor without having to worry about fixed cost commitments like rent payments for factory space and equipment leases. As well, when business demand increases unexpectedly, businesses have more room to expand their operations quickly by increasing their variable cost expenditures rather than making large upfront fixed cost investments in new facilities and equipment. In conclusion, understanding the differences between fixed and variable costs is key for businesses looking to optimize their budgets while still being able to adjust quickly in response to changing market conditions.