Fixed Cost and Variable Cost

Fixed costs refer to those expenditures incurred by the firm which remain unchanged irrespective of the level of output. Expenditures on plant and equipment, insurance premium, salaries of managerial staff, license fees etc. are the examples of fixed costs. Even if the output of firm is zero, these costs will have to be borne by the firm. These costs are4 also called overhead costs or supplementary cost. Thus fixed costs are independent of output in the short-run.

Variable costs refer to those of production which change with the change of output of the firm. These costs rise when output expands and fall when output contracts. Wages of labour, payments for raw materials, power, fuel etc. are the examples of variable costs. These costs are also called prime cost.

Total cost of production can be calculated by adding variable costs with the fixed costs.

Differences Between Fixed Costs and Variable Costs

FIXED COSTS	VARIABLE COSTS
These costs are found only in the short-run. These are the expenditures incurred for fixed factors like plant, management etc. These costs are independent of output. These costs are also called supplementary costs or overhead costs. These costs exist at zero level of output.	1. These costs are found both in short-run and             long-run.2. These are the expenditures incurred for                       employing variable factors like labour, raw                   materials, power etc. 3. These costs change with the change of output. 4. These costs are also called prime costs. 5. These costs are zero at zero level of output.