fixed cost and variable cost pdf Wednesday, December 16, 2020 5:34:35 AM

Fixed Cost And Variable Cost Pdf

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This study note provides a short introduction to fixed and variable costs for businesses in the short run. This means that output can be increased by adding more variable factors such as employing more workers and buying in more raw materials.

Posted In: Business Planning. If you own a business or are an aspiring entrepreneur, it is vital to understand the two types of costs your business will have: fixed costs and variable costs. Analyzing variable costs, in particular, can help businesses make important decisions about how to price their products and which products to make more of. Fixed costs are those expenses that remain relatively constant throughout your business activity. The most significant benefit of fixed costs is they are easy to budget.

Cost Structure: Analyzing Fixed and Variable Costs 1

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Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context.

What is Fixed Cost vs Variable Cost?

In accounting and economics , fixed costs , also known as indirect costs or overhead costs , are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or rents being paid per month. This is in contrast to variable costs , which are volume-related and are paid per quantity produced and unknown at the beginning of the accounting year. For example, a retailer must pay rent and utility bills irrespective of sales. As another example, for a bakery the monthly rent and phone line are fixed costs, irrespective of how much bread is produced and sold; on the other hand, the wages are variable costs, as more workers would need to be hired for the production to increase. Fixed cost are considered an entry barrier for new entrepreneurs.

Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context. This paper exhibits an approach that provides straightforward predictions on the relationship between fixed costs, prices, and consumer welfare.

Fixed cost vs variable cost is the difference in categorizing business costs as either static or fluctuating when there is a change in the activity and sales volume. Fixed cost includes expenses that remain constant for a period of time irrespective of the level of outputs, like rent, salaries, and loan payments, while variable costs are expenses that change directly and proportionally to the changes in business activity level or volume, like direct labor, taxes, and operational expenses. NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area. Fixed costs are predetermined expenses that remain the same throughout a specific period. These overhead costs do not vary with output or how the business is performing. To determine your fixed costs, consider the expenses you would incur if you temporarily closed your business.


Variable costs, or variable expenses, are those that change from one period to another. These are under the category of cost of goods sold (COGS). Your total.


Explaining Fixed and Variable Costs of Production

When you operate a small business, you have two types of costs - fixed costs and variable costs. A change in your fixed or variable costs affects your net income. It also affects your company's breakeven point.

Cost Structure: Analyzing Fixed and Variable Costs 1

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Overview: What are variable costs in accounting?

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