Some prices remain the same over long periods of time, no matter what production levels you achieve. This category is known as fixed costs. Other expenses change with your level of production, or frequently see their prices move around. These costs that move around a lot are known as variable costs.
At your factory, which produces fur-lined underwear, you pay your assembly-line workers $48,000 a year, or $4,000 a month. You pay that amount no matter how many pairs of underwear you crank out. On a regular day, a single worker might make 1,000 pairs of undies. But if the fur-lining machine goes down for repairs, and they make 250 pairs that day, you still owe them the same salary. The cost is fixed. It doesn't change.
Other examples of fixed costs include the rent for your factory and your company's insurance. You have to pay the same amount every month, no matter what.
However, other costs are variable. They change as production changes...like the fur that goes into the underwear. It costs $1 to buy enough fur for one pair of underwear. If you make 1,000 pairs in a day, that cost you $1,000. If you make 250 pairs in a day, it costs $250. The costs vary depending on the situation. Variable costs.
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Finance: What is the Difference Between ...257 Views
Finance, a la shmoop. what it's the difference between fixed and variable
costs? all right welcome on people nothing was broken so nothing had to be
fixed. a fixed cost means that it's like fixed in place- like the steely-eyed gaze [man cries as dollar bill is torn in half]
of Ahab here. a fixed cost is one that you incur whether you sell one unit of a
widget or a million units. variable costs well they vary. they change. think about
the cost of the plastic that goes into each widget. sell only one widget and
well your plastics bill is pretty low. sell a million widgets and it likely costs
a lot to buy the raw plastics will make them widgets right? but okay that's the [kid grins holding stack of plastic toys]
bird's eye view .what time is it? yes example time! okay you own an absinthe
stand called absinthe Pete's. yeah it's a 1925 and people are bored in order to
sell the absinthe you had to have an absinthe from milking factory, which cost
you 400 bucks to build. its 1925 so things are you know cheaper. and deadlier.
all right well that 400 bucks for the factory is a fixed cost. you have to
spend it whether you sell one glass of absinthe or a zillion. without the absent
from milker you have nothing to sell. so you also have to pay 50 bucks a month to [men negotiate]
rent the land on which that factory sits that $50 rent is a fixed recurring cost.
your cost of rent doesn't change whether you sell one gallon of gentleman Pete's
aged reserve or 10,000 gallons of it, you still pay that 50 bucks a month to rent
the land. fixed recurring cost. all right so what's variable. well the Absinthe
itself costs you two cents a cup and you sell it for a nickel. the Absinthe can be
stored basically forever before it goes bad ,you know it's poison so like what [Absinthe with a loaf of bread]
would you expect? that it go bad ?like what what is bad?
well so the cost of producing the Absinthe itself is variable.
if you don't sell any in April the cruelest month ,then you have no variable
cost of absinthe. got it that is the cost of absinthe was zero because you sold
none just keep it in the inventory for next month. if you sell 5000 drinks at 2
cents a drink in may to help people go away, well then your cost varied that
month from zero in April the cruelest month, the 5000 times 2 cents or a
hundred bucks in May. the cost of the absinthe itself is variable. and that's
it. fixed costs are set and don't change. they're fixed in position that can be
one-time fixed charges like the cost of building the factory, and they can be
recurring fixed charges like the cost of that monthly rent .it's the same amount [factory being built]
each month, so it's fixed but it recurs. and then there's variable costs. those
change with output or production levels or changes in the business environment
like if suddenly the food that an absinthe eats gets more expensive. well
then you could be producing the same volumes but each unit of that volume
would vary in costing you more to produce .and trust us when you're dealing
with absinthe it always ends up costing you the next morning. yeah drink plenty [man falls over after drinking several bottles of absinthe]
of water with that.
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