## Businesses Must Clearly Understand Fixed Cost and Variable Cost, Otherwise They Will Be Expensive

When managing a business, the first question to ask yourself is: "Where does the money go?" because it’s essential to distinguish which expenses are "fixed costs"—those you pay regardless of sales—and which are "variable costs"—those that increase with sales volume. Knowledge of fixed and variable costs is the foundation for all business decisions, from profit margins and pricing to investment choices and cost-effectiveness.

## What Are Fixed Costs and Why Are They Your Enemy That Must Be Managed

**Fixed Cost (Fixed Cost)** refers to expenses that do not change regardless of whether you sell 100 units, 1,000 units, or just 1 unit. These costs remain the same, and if you think about it too much, fixed costs are obligations that the company must bear no matter what happens.

### The Reality of Fixed Costs You Need to Know

The key characteristic of fixed costs is their low flexibility—they are not easily reduced. This makes it necessary for businesses to carefully plan their finances, revenue, costs, and profit targets to maintain balance and reasonableness. If your selling price does not cover fixed costs, you will incur losses even with many customers.

Companies that understand fixed costs well can plan their break-even point, calculate the minimum profit needed, and better manage risks. This allows them to adapt more easily when business conditions or markets change.

### Examples of Fixed Costs Businesses Pay Monthly

**Building/Office/Factory Rent** - This is a regular expense with no conditions; it must be paid whether the team works from home or sales volume varies.

**Employee Salaries** - Especially for full-time staff or executives, salaries must be paid regardless of sales performance.

**Insurance** - Companies need to insure assets and resources to mitigate risks; these costs are fixed monthly.

**Depreciation of Machinery/Equipment** - Once machinery is purchased, depreciation is calculated consistently each month/year.

**Loan Interest** - If the company borrows from a bank, interest payments are fixed according to the schedule until the loan is repaid.

## What Are Variable Costs and Why Do They Play a Role in Business

**Variable Cost (Variable Cost)** is the opposite of fixed cost—it changes in direct proportion to production or sales volume. When sales increase, these costs go up; when sales decrease, they go down. This makes variable costs highly flexible.

### Why Variable Costs Are Game Changers

Variable costs are directly related to production/sales and are easier to control. If you want to reduce costs, you can adjust production, save raw materials, reduce labor, or cut shipping sizes—all feasible options.

### Examples of Variable Costs That Adjust with Production Volume

**Raw Materials and Components** - Making one product requires a set amount of raw materials; producing 100 units requires 100 sets. These costs increase with the number of products.

**Direct Labor** - If there are workers directly involved in production, their wages are proportional to the output.

**Energy/Electricity/Water** - The more you produce, the more energy you consume, so these costs increase accordingly.

**Packaging Materials** - Buying boxes or wrapping materials depends on the number of units produced or sold.

**Shipping/Delivery Costs** - Shipping more items costs more; shipping fewer items costs less.

**Sales Commissions** - If sales staff earn a percentage commission, their earnings increase as sales grow.

## Fixed Cost vs Variable Cost: Deep Understanding of the Difference

In fact, understanding fixed and variable costs well allows a business to make smarter decisions about investing in machinery, purchasing materials, or changing operational processes. For example, if direct labor costs are very high, it might lead to decisions to buy automated machinery to replace variable labor costs with fixed costs that are more stable.

| Comparative Features | Fixed Cost | Variable Cost |
|---|---|---|
| **Change with Production** | No, remains constant | Yes, varies directly with production volume |
| **Control** | Difficult to reduce; low flexibility | Easier to control; high flexibility |
| **Common Examples** | Rent, salaries, insurance, interest | Raw materials, wages, energy, packaging |
| **Necessity to Pay** | Must pay even if no production occurs | Incurred only when producing |

## Why Combine Fixed and Variable Costs

**Total Cost** = Fixed Cost + Variable Cost

By combining fixed and variable costs, a company gains a clear picture of total expenses at different production levels. This information is crucial for:

**Pricing** - Setting prices above total cost to ensure profit

**Production Planning** - Knowing how many units to produce/sell to break even (Break-even Point)

**Investment Decisions** - Buying machinery increases fixed costs but may reduce variable costs; weighing the trade-offs is essential

**Cost Control and Monitoring** - Understanding cost structure helps identify areas for savings and improvements

**Risk Assessment** - If market conditions change and sales decline, the company can estimate remaining profit margins

## Clear Summary

Fixed Cost (Fixed Cost) and Variable Cost (Variable Cost) are not just accounting or academic concepts—they are at the heart of business decision-making. Whether it’s pricing, production, investment, or building a sustainable cost structure, a business that understands and manages these costs well will have financial stability, lower risks, and a competitive edge because they know every number and what actions to take when the market shifts.