Difference between Fixed Cost and Variable Cost

Fixed Cost VS Variable Cost

Fixed Cost VS Variable Cost

Cost of Production

By cost of product means that all those expenditures incurred during the production process either they directly related with the production of output or indirectly related with the production of output, they include the rent or royalties paid to the owners of land or other property used, wages of labor, interest on capital profit of the entrepreneur, cost of raw materials and re- placement and repairing charges of machinery. Cost of production can be classified as production cost i.e. rewards of factors of productions, selling’s cost e.g. advertisement and other costs e.g. insurance charges, rates and taxes.

Fixed Cost

This cost also called the supplementary cost or indirect cost. Fixed cost all those cost which have to bear even when the output is zero or temporarily stopped. Fixed cost do not vary with the output. Indirect cost include cost of plant and machinery rent of land or building salaries of permanent administrative staff and interest on capital. Fixed cost are independent of output generally fixed cost is incurred in hiring factors of production. Whose amount cannot be altered in the short period. Fixed cost necessary to start production process but they not directly involved in the production process. That is why, these costs also called the indirect cost.

 Variable Cost

Variable cost  also called the direct or prime cost. This cost those expenditures of cost which vary directly with the output. Variable cost increase with the increase in output and decrease with output and when output zero and variable cost zero. Variable cost raw materials primary and finished; electricity expenses gas charges, water and telephone expenses and transport expenses. If output increases this expenditure increase and with a decrease in output these expenditures decrease.

The difference in fixed cost and variable cost is only in the short period because fixed cost become variable cost in the long period.

Short Period and Long Period Cost

Short period is period within which the firm cannot vary fixed factor of production. Such as plant and machinery, Rent of land and building, salary of permanent staff , overhead charges and interest on capital. In the short period a firm can vary only variable factors of production such as raw materials, water telephone, water and transport expenses. The cost incurred on variable factors of production in the short run called the short run cost.

Short Period and Long Period Cost

Long period is a period within which the firm can vary not only the variable factor of production. But also the fixed factor of production. If profits increase in the short period the firm can increase production only by hiring services of more labor and buying more raw materials. But it cannot alter the size of plant and machinery or it cannot build a new plant. In the long run a firm can increase or decrease the amount of variable as well as fixed factor of production. The cost incurred on the variable as well as on the fixed factor of production called the long run cost.

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