## How to Find Fixed Costs and Variable Costs You Need to Know for Business Management

**Fixed Cost (Fixed Cost)** and **Variable Cost (Variable Cost)** are twin concepts in managerial accounting, which fundamentally differ. If managers do not understand this difference, budgeting and pricing decisions are often flawed. This article will help deepen your understanding.

## What Are Fixed Costs? Simple Explanation

**Fixed Cost (Fixed Cost)** are expenses that do not depend on the number of goods or services produced. Whether the factory operates at 10% or 100%, the payment remains the same. This characteristic makes fixed costs like a "mandatory burden" for the business.

### Details of Fixed Costs Managers Must Track

- **Rent** - paid whether producing or not
- **Salaries of permanent staff** - paid monthly the same
- **Insurance** - coverage for assets and risks
- **Depreciation of machinery** - decreases over time, not production
- **Loan interest** - debt obligations

Calculating fixed costs is straightforward because they are contractual and can be read from agreements. Accurate estimation of fixed costs helps managers better plan cash flow.

## What Are Variable Costs? Understanding Through Production

**Variable Cost (Variable Cost)** are expenses that change according to the quantity of goods or services produced. The more you produce, the higher these costs become. This type offers more flexibility because they can be controlled by adjusting production volume.

### Examples of Variable Costs in Production

- **Raw materials and components** - more products require more raw materials
- **Direct labor wages** - paid based on the number of units produced
- **Electricity and water for production** - more operation hours increase costs
- **Packaging costs** - more products mean higher packaging expenses
- **Shipping and delivery costs** - more goods increase shipping costs
- **Sales commissions** - higher sales volume results in higher commissions

Variable costs provide greater management freedom because they can be reduced if cost control is needed.

## Comparing Fixed Costs vs. Variable Costs

| Feature | Fixed Costs | Variable Costs |
|--------|--------------|----------------|
| Changes | Do not change regardless of production volume | Change with production volume |
| Control | Difficult to control in the short term | Can be adjusted based on circumstances |
| Examples | Rent, salaries | Raw materials, wages |
| Impact on Profit | Highest when sales volume is low | Decreases when production is reduced |

## How to Accurately Calculate Fixed Costs

Estimating fixed costs is not difficult if you follow these steps:

### 1. Refer to contracts and commitments
Most fixed costs come from long-term agreements, such as lease contracts or loan agreements. As long as these figures are predictable and stable throughout the year

### 2. Separate other payment schedules
Regular payments like salaries, insurance, auxiliary equipment, etc., if paid consistently each year, are considered fixed costs

### 3. Analyze per-unit costs
Fixed cost per unit = Total fixed costs ÷ Number of units produced. As production increases, fixed cost per unit decreases

## The Importance of Understanding Both Cost Types

Knowing and understanding the differences between fixed and variable costs helps managers to:

- **Set accurate product prices** - must cover both types
- **Plan production intelligently** - reduce variable costs if problematic
- **Evaluate the break-even point (Break-even Point)** - know how much to sell to avoid losses
- **Make investment decisions** - invest in machinery to reduce variable costs or lease more
- **Control and reduce total costs** - find ways to cut costs through renegotiation or improving production efficiency

## Summary

Fixed costs and variable costs are two sides of a business’s cost structure. Deep understanding of these concepts enables managers to make better decisions, whether setting prices, planning production, or assessing business viability. Accurately estimating fixed costs and effectively controlling variable costs will lead the business toward long-term success.