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Fixed Variable Costs

The cost which increases or decreases exactly in the same proportion in which the volume of output increases or decreases is known as ‘variable cost’’. The cost which remains static or constant irrespective of the changes in output is regarded as ‘fixed-cost’. As a matter of fact this concept of fixed and variable costs holds goods in short run and hence it is more a theoretical concept. In practice, no cost increases or decreases proportionately with the increase or decrease in output and no cost remains static for all volumes of output and for all times. Hence, those costs which tend to vary with output or those which have a major relation with output should be termed as ‘variable costs’ and those cost which tend to be constant at different volumes of output which have no significant relation with output should be termed as ‘fixed costs’. The fixed costs have relationship with time. The cost which neither very proportionately nor remain stationary are called ‘semi-variable’ or ‘semi-fixed costs’. If a cost varies more than proportionately, then also it is a semi-variable cost. Depreciation, repairs, supervision costs etc. are good examples of semi-variable costs. Rent, insurance charges, management salaries – which are examples of fixed costs also vary with inflationary trends in the economy and change in the market forces. Volume of output may also affect them but these are not the main influencing factors and hence such costs shall be termed as ‘fixed costs’. Variable costs like wages labourers, cost of direct material, power etc. also vary disproportionately with output because of the same reasons but here volume of output is the major influencing factor and hence these cost shall be termed as ‘variable costs’.

Theoretically speaking, variable cost remains constant per unit output and fixed cost remains constant in total or per unit of time.

Fixed costs are sometimes referred to as “period costs” and variable costs as “direct costs” in the system of direct costing. Fixed costs can be further classified into (i) committed fixed costs and (ii) discretionary fixed costs. Committed fixed costs are unavoidable in short run if the organisation to function. Examples of such fixed costs are depreciation, rent, pay and allowances of staff etc. discretionary fixed costs are those which are set at a fixed amount for specific time periods by management in the budgeting process. Examples of such costs are research and development costs, advertisement and market research expenses etc. Certain costs remain fixed over a range of activity and then jump to a new level as activity changes. Such costs are treated as “step costs”. For example, a foreman is in a position to supervise a given number of employees. Beyond this number it will be necessary to hire a second, then a third and so on. Similarly, rental cost of delivery vehicles will also follow a similar pattern. These costs may also be taken as a type of semi-variable costs.