why is it important to know fixed and variable costs?
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In short, knowing and managing variable costs is essential as you respond to changes in the marketplace and in your company's growth patterns. A solid understanding of your company's fixed and variable costs is what allows us to identify the profitable price level for its products or services.
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In the short run, there are both fixed and variable costs. In the long run, there are no fixed costs. Efficient long run costs are sustained when the combination of outputs that a firm produces results in the desired quantity of the goods at the lowest possible cost. Variable costs change with the output.
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Fixed costs in total does not change within a relevant range as the level of output increases or decreases, whereas variable costs in total vary in direct proportion to changes in output within a relevant range.
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Absorption costing includes all the costs associated with the manufacturing of a product, while variable costing only includes the variable costs directly incurred in production but not any of the fixed costs.
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Fixed expenses occur in predictable amounts and are usually paid in monthly intervals. Periodic expenses also occur in predictable amounts and intervals, but are much less frequent (i.e. quarterly). Variable expenses are discretionary and can be modified by your financial behavior.
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Marginal costs are a function of the total cost of production, which includes fixed and variable costs. Fixed costs of production are constant, occur regularly, and do not change in the short-term with changes in production. Examples of fixed costs are rent and insurance payments, property taxes, and employee salaries.
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Variable costs vary with increases or decreases in production. Fixed costs remain the same, whether production increases or decreases. Wages paid to workers for their regular hours are a fixed cost. Any extra time they spend on the job is a variable cost.
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Based on behavior, costs are categorized as either fixed, variable or mixed. Fixed costs are constant regardless of activity level, variable costs change proportionately with output and mixed costs are a combination of both.
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Fixed costs are irrelevant assuming that the decision at hand does not involve doing anything that would change these stationary costs. ... Any cost, fixed or variable that would be different for a particular course of action being analyzed is relevant for that alternative.
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Committed costs appear fixed since their supply is independent of the amount actually used. Flexible resources are supplied as needed, so their costs appear to be variable with demand.
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Absorption costing includes all costs, including fixed costs, related to production, while variable costing only includes the variable costs directly incurred in production. Companies that use variable costing keep fixed-cost operating expenses separate from production costs.
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Direct costs can be fixed costs such as the rent for a production plant. ... Variable costs can also be indirect costs such as electricity for the production plant since it can't be tied to one specific product.
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Fixed cost are defined as costs related to the fixed factors of production i.e the factors of production which are present even when the total output is zero. ... So fixed cost is never zero.
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Fixed costs are associated with the basic operating and overhead costs of a business. They include items such as building rent, utilities, wages, and insurance. Most forms of depreciation and tangible assets qualify as fixed costs as well. Fixed costs are considered indirect costs of production.
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A company's total cost is composed of its total fixed costs and its total variable costs combined. Variable costs vary with the amount produced. ... On the other hand, a fixed cost does not vary with the volume of production. A Fixed cost does not change with the amount of goods or services a company produces.
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In accounting, variable costs are costs that vary with production volume or business activity. ... Fixed costs include various indirect costs and fixed manufacturing overhead costs. Variable costs include direct labor, direct materials, and variable overhead.
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Fixed cost is the cost that remains constant whether you do business or not or at all levels of your business activities. ... The amount of money that you need to start your business is called as initial investments such as deposit for the place, furniture and fixtures, machinery, computers etc.