Many people start a business without knowing the difference between fixed costs and variable costs.
This is understandable, as it can be difficult to understand how these two types of expenses work.
Luckily for you, we are going to break down the differences in this article! First, let’s discuss what variable cost means.
A variable cost changes depending on decisions made later on in production or operations.
For example, if you have an hourly employee who gets paid $12/hour regardless of hours worked or number of days they come into work each week then their wages are considered a(n) __cost.
On the other hand, a fixed cost remains unchanged regardless of decisions made later on.
If you are renting out office space for $100/month then your lease expense is an __cost.
The key to understanding these two types of costs is that one will be unchanging while the other changes as time goes by.
The bottom line?
Don’t get them mixed up! You’ll save yourself some headache and confusion down the line if you keep this difference in mind from the start.
Now let’s go over how each type of cost can affect your business.
Fixed Costs: Fixed expenses remain constant despite a company’s output or sales volume so they should only ever be incurred when it makes sense to do so .