Whatever business you are currently running, it will definitely incur costs. Well, these costs are divided into several types, such as fixed costs or fixed costs, variable costs or variable costs, semi-variable costs, direct costs, indirect costs, and many more. These various costs are required for the production process to the product marketing process.
Well, on this occasion, let’s focus on discussing fixed costs and the difference between them and variable costs.
Contents
1 Definition of Fixed Cost
2 Types of Fixed Cost
2.1 1. Committed Fixed Cost
2.2 2. Discretionary Fixed Cost
3 Definition of Variable Cost
4 Then, what is the difference between Fixed Cost and Variable Cost
4.1 1. Differences in Character
4.2 2. Linkage
4.3 3. Based on Time
4.4 4. Inventory Calculation
4.4.1 Also read: Budget Analysis: Complete Understanding and How to Do It
5 Conclusion
Definition of Fixed Cost
Fixed costs or fixed costs are costs incurred by the company on a fixed or constant basis, or usually do not change even though there is an increase or decrease in the number of goods or services it produces.
Fixed costs are not affected by changes in the company’s business activities. Fixed costs that are incurred constantly do not mean they are always constant. Fixed costs are still subject to change in the future.
A simple example is like the cost of renting a warehouse. The company must continue to pay the same warehouse costs every year even though the products produced by the company are small or large.
Fixed costs will continue to be issued constantly by the company for a certain period. Although costs can be increased or decreased by the party providing the warehouse, usually these changes will occur over a very long period of time.
Types of Fixed Cost
Fixed costs are divided into two types, namely committed fixed costs and discretionary fixed costs.
1. Committed Fixed Cost
The first type you should know about is a committed fixed cost. These costs are costs that must be incurred by the company in order to maintain its stability.
This is closely related to the organizational structure and also the investment in the company’s own facilities. When the company is declared bankrupt there must be costs incurred.
2. Discretionary Fixed Cost
The second type that you should know about is the discretionary fixed cost. These costs must be incurred under certain conditions that must be incurred under certain conditions which can be reduced or eliminated without any effect on the profits generated by the company.
This is what makes the company management have to reduce discretionary costs when there is a cash shortage condition in a short period of time.
Definition of Variable Cost
Simply put, variable costs or variable costs are costs that will depend on the results of production. Variable production costs are quantities produced per unit on a constant basis.
When there is an increase in the amount of production and output, the variable costs will also increase. Conversely, if it turns out that fewer products can be produced, then the variable costs associated with production will also decrease.
So, variable costs are costs incurred by a company in a changing manner based on changes in the amount of the company’s production.
It can also be interpreted that variable costs are highly dependent on fluctuations in business activities in producing goods produced by the company. Usually, the variable costs between each industry or business field are different.
Then, what is the difference between Fixed Cost and Variable Cost?
In fact, there are many major differences between fixed costs and variable costs. If we can conclude, the various differences between the two are as follows:
1. Character Differences
Fixed costs are more fixed or patent. On the other hand, variable costs are highly uncertain or highly variable.
2. Linkage
In this case, the relationship is the relationship between costs and the production process produced by the company. Fixed costs are not related to the company’s production capacity. While the variable cost, the relationship between the production process is very close.
3. Based on Time
Fixed costs are costs that are time-based, that is, constant or fixed and will not change in nature for at least one period. While variable costs are closely related to volume and will continue to change according to changes in volume.
4. Inventory Counting
Fixed costs and variable costs also differ in terms of valuing inventory. Fixed costs will not be included when inventory valuation occurs, while variable costs will always be included.
The difference between fixed costs and variable costs is very important for you, business people or companies to understand so that later it can be easier to include them in financial statements. In addition, these two reports can also be used as valid data to determine business developments.
Conclusion
So, all costs incurred in a company or business entity can be divided into two types of costs, namely fixed costs and variable costs.
Just as the name suggests, fixed costs are fixed costs that will not change even when the company is quiet or busy. While variable costs are costs that are variable, can go up or down depending on the number of sales or production produced by the company.