How do fixed costs differ from variable costs?

Fixed costs are expenses that do not change regardless of the level of goods or services produced by a business. This means they remain constant whether production increases or decreases. Examples of fixed costs include rent, salaries, and insurance, which are incurred over time irrespective of the company’s output.

On the other hand, variable costs are directly tied to the production volume; they fluctuate based on how much is produced. If more units are produced, variable costs increase, and if fewer units are produced, these costs decrease. Common examples of variable costs are raw materials, direct labor costs associated with production, and utility costs that vary with usage.

Understanding this distinction is crucial for financial planning, budgeting, and overall business strategy, as it helps businesses predict their expenses based on expected levels of production and sales.