The cost has two main types: fixed cost and variable cost, these are incurred by a company when it plans to provide its services or products to the clients. In simple words we know the fixed cost as the cost that remains constant regardless of what amount of products are being produced by the company, however, the variable cost has a tendency to vary and it depends on the amount of the output that is produced.
Two types that are mentioned above are associated with the production cost while a company is providing its offers in terms of products or services. The variable cost that has a tendency to vary include the following:
- Raw material
Fixed cost does not depend on the production output and remains constant no matter what. This includes the following:
- Interest payment
- Rental Payment
Before we delve into further discussion, we need to have a look at the focused points of discussion in today’s article. This includes the following:
- What is Variable Cost?
- Explanation of Fixed Cost
- Focused Consideration of Fixed Cost and Variable Cost
- The Bottom Line
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Define Variable Cost:
The variable cost of a company is often considered to be associated with the products that are produced or the services that the company can offer to its clients. Moreover, the production volume of the company directly affects the increase and decrease in a company’s variable cost.
Different industries have different variable costs. Therefore, it is useless to make a comparison of a company that is car manufacture and a company that is an appliance manufacturer. The major reason behind this is that product output is not the same. It is suggested to compare the companies that are associated with the same manufacturing industry for instant car manufacturing.
Explanation of Fixed Cost:
Unlike variable cost, the volume production of a company cannot affect the fixed cost and it remains constant no matter what. Even if products and services are not being produced, fixed costs will not budge.
It is an unavoidable scenario for a company to intend to escape from the fixed cost in any phase of the business.
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Focused Consideration Fixed Cost and Variable Cost:
In case a company has a more fixed cost, to ensure the balance it has to increase the revenues and more efforts to put in so that the products and services are giving equal benefits. Because of the fact that fixed costs will come on a daily basis to deal with and there are rare chances to change them.
However, if we take variable costs under discussion, it has a tendency to remain flat as well. The amount of products produced by the company has a direct link with the variable cost. Variable cost drops when the production of a company is increasing.
The Bottom Line:
Now that you have developed a better understanding of fixed cost and variable cost, we can sum up the discussion by saying that it is important to know the differences between the discussed cost categories and how to explain this as a part of your financial statement.
In case a company successfully lowers the fixed and variable costs, it will be able to get the most benefits. We hope this article helped to make it stick in the industry and be the most advantageous out of your business struggle.
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Disclaimer: This article intends to provide general information based on fixed cost and variable cost along with the relevant details.