Table of Contents

The Difference Between Fixed Costs, Variable Costs, and Total Costs

By

澳洲幸运5官方开奖结果体彩网:Steven Nickolas

Updated March 28, 2025

Reviewed by

Andy Smith

Fact checked by

Suzanne Kvilhaug

Close-up of calculator and data — Martin Barraud / Getty Images

What Is the Difference Bꦯetw𒁏een the Different Cost Types?

Fixed costs, variable costs, and total costs all sound similar, but there are significant differences among the three. The main difference is that fixed costs do not account for the number of goods or sౠervices a company produces, while variable costs and total costs depend primar🧔ily on that number.

Key Takeaways:

Fixed costs do not account for the number of goods or services a company produces.
Variable costs and total costs depend on the number of goods or services a company produces.
Companies must consider both types of costs to ensure they are fiscally solvent and thriving over the long term.

Understanding the Different Cost Types

As the name suggests, fixed costs do not change as a company𒀰 produces more or fewer products or prov🌟ides more or fewer services. For example, rent that a widget company pays for a building will be the same regardless of the number of widgets produced within that building.

In contrast, variable costs do 💫change depending on production volume. For example, the cost of materials that go into producing the widgets will rise as the number of widgets produced increases.

Fixed Costs

A fixed cost is an expense that a company is obligated to pay, and it is usually time-related. A prime example of a fixed cost would be the rent a company pays monthly for office space and/or manufacturing facilities. This is typically a contractually agreed-upon term that does not fluctuate unless both landlords and tenants agree to renegotiate a lease agreement.

In the case of some rental properties, there may be predetermined incremental annual rent increases where the lease stipulates rent hikes of certain percentages from one year to the next. However, these increases are transparent and baked into the cost equation. Consequently, accountants can calculate their companies’ overall budgets with the lead time necessary to ensure a business’s 澳洲幸运5官方开奖结果体彩网:bottom line is protected. This is typically how 澳洲幸运5官方开奖结果体彩网:rent-controlled properties operate.

Variable Costs

澳洲幸运5官方开奖结果体彩网:Variable costs are functions of a company’s production volume. For example, widget company ZYX may have to spend $10 to manufacture one unit of product. Therefore, if the company receives an inordinately large 澳洲幸运5官方开奖结果体彩网:purchase order duri🉐ng a given month, then its monthly expenditures rise accordingl🐼y.

Another example is a retailer that doubles its typical order to prepare for a holiday rush. This increases company ZYX’s expenses to fulfill the order. Larger purchase orders may also result in ♛increased overtime pay fo🌞r employees.

Conversely, purchase orders may decline during offseasons and slower economic times, ultimately pushing down labor and 澳洲幸运5官方开奖结果体彩网:manufacturing costs accordingly. In addition, the costs of 澳洲幸运5官方开奖结果体彩网:commodities and other 澳洲幸运5官方开奖结果体彩网:raw materials f𝐆o🥀r manufacturing may rise and fall, which can also affect a company’s variable expenses.

Total Costs

Total costs are composed of both total fixed costs and total variable costs. Total fixed costs are the sum of all consistent, non-variable expenses a company must pay. For eꦐxample, suppose a company leases office space for $10,000 per month, rents machinery for $5,000 per month, and has a $1,000 monthly utility bill. In this case, the company’s total fixed costs would be $16,000.

In terms of variable costs, i🐼f a company produces 2,000 widgets at $10 per unit, and it must pay em꧃ployees $5,000 in overtime to keep up with the demand, the total variable costs would be $25,000 ($20,000 in products plus $5,000 in labor costs).

Consequently, the total costs, combining $16,000 in fixed costs with $25,000 in variable costs, would come to $41,000. Total costs are an essential value a company must track to ensurꦜe the business remains fiscally solvent and thrives over the long term.

Does a Company’s Production or Sales Affect Fixed Costs?

No. Fixed costs are a business expense that doesn’t change with an increase or decrease in a company’s opꦯerational activ⭕ities.

Are Variable Costs Short-Term or Long-Term?

Variable costs are usually viewed as short-term because they can be adjusted quickly. That’s because variable costs are an expense that changes in proportion to how much a company produces 🐈or sells. They rise as production or sales i🌳ncrease and fall as production or sales decrease.

Does a Company Report Total Costs in Its Financial Statements?

No, a company doesn’t have a line specifically for total costs in its key 澳洲幸运5官方开奖结果体彩网:financial statements. Instead:

A 澳洲幸运5官方开奖结果体彩网:balance sheet reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
A 澳洲幸运5官方开奖结果体彩网:cash flow statement provides aggregate data on how cash is moving through a company (including operations, investments, and financing activities) and highlights liquidity (whether the company can generate enough cash to sustain itself, invest in growth, and meet its financial obligations).
An 澳洲幸运5官方开奖结果体彩网:income statement, also known as a 澳洲幸运5官方开奖结果体彩网:൩profit and loss (P&L) statement or a statement of revenue and expense, tracks a company’s revenue, expenses, gains, and losses during a set period.

The Bottom Line

A company looking to reduce fixed costs will likely need time, as these costs are usually set in a contract. New or renegotiated contracts could cut fixed costs. Other strategies include analyzing usage and cutting waste; outsour𝕴cing areas like marketing or customer service; and implementing workflow technology.

A company looking to cut variable costs could reduce inventory by finding new suppliers that offer more competitive prices, or negotiating better rates or discounts from existing suppliers. Other strategies include improving efficiency; analyzing products and services for cost savi🎃ngs; managing salary and wage costs; and i𝓰nvesting in technology.

Implementing fixed and variable 澳洲幸运5官方开奖结果体彩网:cost controls should reduce total costs.

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