Fixed costs:
- Fixed or constant costs are not a function of output; they do not vary with output upto a certain level of activity.
- These costs require a fixed expenditure of funds irrespective of the level of output, e.g., rent, property taxes, interest on loans and depreciation when taken as a function of time and not of output.
- However, these costs vary with the size of the plant and are a function of capacity. Therefore, fixed costs do not vary with the volume of output within a capacity level.
- Fixed costs cannot be avoided. These costs are fixed so long as operations are going on. They can be avoided only when the operations are completely closed down.
- These are, by their very nature, inescapable or uncontrollable costs. But, there are some costs which will continue even after the operations are suspended, as for example, for storing of old machines which cannot be sold in the market.
- These are called shut down costs. Some of the fixed costs such as costs of advertising, etc. are programmed fixed costs or discretionary expenses, because they depend upon the discretion of management whether to spend on these services or not.
Variable costs
- Variable costs are costs that are a function of output in the production period.
- For example, wages of casual labourers and cost of raw materials and cost of all other inputs that vary with output are variable costs. Variable costs vary directly and sometimes proportionately with output.
- Over certain ranges of production, they may vary less or more than proportionately depending on the utilization of fixed facilities and resources during the production process.
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