Distinguish between fixed cost and variable cost using an example.

Fixed cost: These costs are incurred on fixed factors like land, building, equipments, plants, superior types of labour, top management etc. fixed costs in the short run remains constant because the firm does not change the size of plant and the amount of the fixed factors employed. Fixed costs do not vary with either expansion or contraction in output. These cost are to be incurred by a firm even output is zero. Even if the firm close down its operation for some time temporarily in the short run, but remains in business, these cost have to be borne by it. Hence, these costs are independent of output and are referred to as unavoidable contractual cost.

Prof. Marshall called fixed cost as supplementary costs. They include such items as contractual rent payments, interest on capital borrowed, insurance premium, depreciation and maintenance allowance, administrative expenses like manager‘s salary or salary of the permanent staff, property and business taxes, license fees, etc. They are called as over- head costs because these costs are to incurred whether there is production or not. These costs are to be distributed on each units of output produced by a firm. Hence, they are called as indirect costs.

Variable Costs: The costs corresponding to variable factors are described as variable costs. These costs are incurred on raw materials, ordinary labour, transport, power, fuel, water etc, which directly vary in the short runs.
Variable costs are directly and proportionately increases or decreases with the level of output. If a firm shut down for some times in the short run; then it will not use the variable factors of production and will not therefore incurs any variable costs. Variable costs are incurred only when some amount of output is produced. Total variable cost increases with the level of increase in the level of production and vice-versa. Prof. Marshall called variable costs as prime costs or direct costs because the volume of output produced by a firm depends directly upon them. It is clear from the above description that a production cost consists of both fixed as well as variable costs. The difference between the two is meaningful and relevant only in the short run. In the long run all costs become variable because all factors of production become adjustable and variable in the long run.
However, the distinction between the fixed and variable costs is very important in theshort because it influences the average costs behavior of the firm. In the short run, even if a firm wants to close down its operation but wants to remain in the business, it will have to incur fixed costs but it must cover at least its variable costs.
Distinguish between fixed cost and variable cost using an example. Distinguish between fixed cost and variable cost using an example. Reviewed by enakta13 on February 11, 2013 Rating: 5

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