QUESTION 71
WHAT’S THE DIFFERENCE BETWEEN FIXED AND VARIABLE COSTS?
Why it’s important: An understanding of fixed and variable costs enables you to calculate the breakeven point.
Costs can be classified in various ways. In Question 67 costs were analysed into direct costs and overheads. These same costs can be described as either fixed or variable costs.
- Fixed costs are those that remain the same, regardless of the level of production. For example, just because production goes up from 100,000 to 102,000 units doesn’t mean an increase in administrative salaries, rates, office heating and lighting, advertising or auditors’ fees, and nor would you have to buy a new machine or property to cope with such a change.
- Variable costs do increase in line ...
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