Fixed vs Variable Costs
The late TV news delivers the current status of our economy. Most of us are interested between our country’s currency rate versus the dollar rate (if you’re not from the US). Some are wishing that the dollar rate would go up or go down. Then several images of charts and line graphs will be flashed on our TV screens. The reporters will interview some economists and let them interpret the way things are. Well, these are the usual TV events. For those who don’t care much about the current status of their economy, they will simply let the economy news pass by, as if they have heard nothing.
Dealing with the economy, as well as confusing charts and line graphs is already too much for an ordinary human brain. The only people who care much about the fluctuating bars and lines are the president, prime minister, (king), entrepreneurs, businessmen and economists. They pay much attention to the economy because it will primarily affect their money on the line.
Ordinary people like us only care about the difference between fixed and variable costs, back when we are still students. If we don’t understand these two different terms, for sure, our economy grade will fluctuate from high to low or from low to lower. Our school sponsors, our parents will definitely get outrageous if we have fluctuating failing marks. And that is the painful reality. Those days in economy class are really a torture for non-business minded people.
Let us review the difference between fixed and variable costs. According to some reliable online sources, a fixed cost is a cost that does not change (no matter what). It does not change whether there is an increase or decrease in the quantity of goods and services produced. That’s why it is called fixed! Who pays for the fixed cost? A company or any self-regulating body pays for the expenses of fixed costs. Fixed costs make up the two components of the goods or services total cost, along with its inseparable partner component, the variable cost.
Examples of fixed costs are your salary. In a month, you earn a salary of $500. In the next month, you also get a $500. It will not change unless if you are promoted or even demoted! Promoted employees of course have higher fixed salaries. Another good example is your monthly rent. You and your landlord agree to have you pay $100 per month. That will not change unless the water and electricity rates have gone higher.
Let us now put variable cost in the spotlight. Again, according to some reliable online sources, a variable cost is a cost that varies (changes no matter what). It is a type of cost that changes when there is a rise and fall in a company’s production volume. If a company produces several goods and services, the pay will be high. However, on the other hand, if a company produces little output, the pay will also be little.
Examples of variable costs are again, your salary. If you are an hourly worker, you only get paid for the number of hours you have worked. Unlike the stable eight hour work, you get more or less depending on the time you have spent for work.
Summary:
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Fixed cost and variable cost are the two components of total cost.
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A fixed cost does not change whether there is an increase or decrease in the quantity of goods and services produced.
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A variable cost is a type of cost that changes when there is a rise and fall in a company’s production volume.