## What Is Fixed Cost and How Does It Differ from Variable Cost

When managing a business, executives need to understand the cost structure clearly because it determines how to set the selling price and how much profit can be made. Especially, distinguishing between **fixed costs** and **variable costs** is fundamental to accurate financial analysis.

### Fixed Cost (What is it?

**Fixed costs** are expenses that a business must pay every month or year, regardless of whether sales are high or low, whether units are produced or not produced at all.

The characteristic of fixed costs is **stability** — they do not change with the level of production or sales volume. Because of this stability, these costs serve as a reliable basis for managers to plan budgets. However, they are always liabilities that must be borne.

) Examples of Fixed Costs

- **Rent**: Office, factory, or shop space paid according to lease agreements
- **Salaries**: Regular salaries of full-time employees or management wages
- **Insurance**: Business insurance, property insurance paid annually or monthly
- **Depreciation**: Allocated costs of equipment or buildings purchased in the past
- **Loan interest**: Interest on borrowed funds paid regularly
- **Utilities**: Electricity, water, internet ###the basic service charges(

## What Is a Variable Cost )Variable Cost(

Contrary to fixed costs, **variable costs** are expenses that increase or decrease according to the quantity of goods produced or sold. The more produced, the higher the cost; the less produced, the lower the cost.

The key feature of variable costs is **flexibility** — they can be controlled by adjusting the level of production, offering more freedom than fixed costs.

) Examples of Variable Costs

- **Raw materials**: Materials and components used in manufacturing, purchased in proportion to production volume
- **Direct labor wages**: Wages paid to workers ###by piece rate or hourly( depending on production
- **Packaging costs**: Boxes, bags, product labels used for packaging units
- **Transportation costs**: Shipping expenses to deliver products to customers; higher volume means higher costs
- **Commissions**: Percentage paid to sales staff based on sales generated
- **Production energy costs**: Electricity, gas, water used in manufacturing processes

## Main Differences Between Fixed and Variable Costs

| Criterion | Fixed Cost | Variable Cost |
|--------------|--------------|--------------|
| **Change with volume** | Does not change | Changes with volume |
| **Stability** | Stable and predictable | Fluctuates depending on production |
| **Examples** | Rent, salaries, interest | Raw materials, commissions, shipping costs |
| **Impact on profit** | Higher volume lowers per-unit cost | Higher volume increases total cost |
| **Control methods** | Difficult to reduce quickly | Can be adjusted as needed |

## Why Are Fixed Costs Important for Business Decisions

Understanding fixed costs helps managers to:

**1. Set appropriate selling prices** — Prices must cover all fixed costs plus variable costs and generate sufficient profit.

**2. Plan for growth** — Knowing how much needs to be sold to cover fixed costs )Break-even point( helps set sales targets.

**3. Make investment decisions** — When considering purchasing new equipment or expanding facilities, it’s essential to know how much fixed costs will increase and how much additional sales are needed to justify the investment.

**4. Assess competitiveness** — Businesses with high fixed costs need a minimum sales volume; if sales fall below that, losses occur.

## Total Cost Analysis

In business operations, total cost = fixed costs + variable costs.

Knowing total costs allows for:

- **Profit analysis**: Calculating profit per unit and total profit
- **Performance comparison**: Comparing total costs across different production cycles or products
- **Cost reduction**: Identifying high-cost areas and finding ways to reduce them
- **Scenario planning**: Forecasting how profits might change if market conditions shift

Example: If in one month, 1,000 units are produced with fixed costs of 100,000 THB and variable costs of 50,000 THB, total cost = 150,000 THB, cost per unit = 150 THB.

If the next month, production increases to 2,000 units with fixed costs still at 100,000 THB and variable costs at 100,000 THB, total cost = 200,000 THB, cost per unit = 100 THB )decreases(.

## Summary

Fixed and variable costs are crucial components of business management. Distinguishing and understanding their characteristics enable managers to set prices, plan production, make investment decisions, and control costs effectively.

Fixed costs are stable but inflexible, while variable costs are flexible and adaptable to circumstances. Balancing both types and managing them efficiently is key to maintaining financial stability and fostering long-term growth.