Fixed Costs & Variable Costs

Variable Costs (Traits)

- Variable costs rise as production or sales increase and fall as they decrease. - The variable cost per unit is typically the same regardless of production volume. (Example: If it costs $5 in raw materials to produce one unit, this cost remains $5 whether you produce 10 or 100 units) - Direct labor costs, cost of raw materials, and sales commission.

Variable Costs (Definition)

Expenses that fluctuate in direct proportion to changes in the production or sales volume. These costs increase when production or sales increase and decrease when production or sales decrease.

Fixed Costs (Definition)

Expenses that remain constant in total within a relevant range of production or sales volume, regardless of how much a company produces or sells. They do not fluctuate with changes in production levels.

Fixed Costs (Traits)

- Remain fixed over a relevant range - Fixed costs per unit decrease as production levels increase. (Example: If a company produces 100 units, the fixed cost per unit is higher compared to producing 1,000 units)

Variable Costs (Examples) Couch Potato, LLC

- Utility fee based on units manufactured - Sales commission, per unit sold - Carpenter's wages - Upholstery/Material coverings - Couch seat cushions - Plywood for couches - Furniture painters wages - Raw materials

Fixed Costs (Example) Couch Potato, LLC

- Blades for a carpenters knives - Safety gloves for a saw operator - Production supervisors wages - Warehouse water expenses - Corporate jet lease - Forklift driver hourly rate - Propane for heating glue machines - Advertising fees - Utilities for sales office - Salesman annual bonus - Unemployment tax for painters - Utilities (Headquarters) - Depreciation (Factory)