Difference between Fixed and Variable Cost

Cost of Production

By cost of product means that all those expenditures incurred during the production process either they are 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 costs i.e. rewards of factors of productions, selling’s costs e.g. advertisement and other costs e.g. insurance charges, rates and taxes.

Fixed cost and variable cost

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

Fixed and Variable cost

Variable costs are also called the direct or prime costs. Variable costs are those expenditures of costs which vary directly with the output. Variable costs increase with the increase in output and decrease with output and when output is zero, variable cost is zero. Variable costs are 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 costs become variable costs in the long period.

Short Period and Long Period Costs

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 costs incurred on variable factors of production in the short run are called the short run costs.

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 costs incurred on the variable as well as on the fixed factor of production are called the long run costs.