What distinguishes fixed costs from variable costs?

Fixed costs are characterized by their constancy regardless of the production levels, meaning that they remain unchanged over a relevant range of output. Examples of fixed costs include rent, salaries of permanent staff, and insurance. These expenses do not fluctuate as production increases or decreases, hence they do not vary with the volume of goods or services produced.

On the other hand, variable costs are directly tied to production levels and will change as the output increases or decreases. Examples of variable costs include costs for raw materials, direct labor involved in manufacturing, and utility costs that increase with additional production activities.

The distinction is crucial for businesses as it impacts budgeting, financial forecasting, and decision-making related to pricing, production levels, and profitability analysis. Understanding how fixed and variable costs behave is key to managing resources effectively and ensuring long-term sustainability in business operations.