Difference between Fixed, Mixed, and Variable Costs

Difference between Fixed, Mixed, and Variable Costs

Introduction

Companies incur various types of production costs. Production costs are expenses incurred by companies while producing goods and services. The three types of production costs are fixed, variable, and variable costs. Fixed costs remain constants, while variable costs vary based on the production volume, and mixed costs have both traits of fixed and variable costs.

  1. Fixed costs

Unlike other production costs, fixed costs remain constant irrespective of goods and services produced. Therefore, companies have no control over fixed costs (Briciu, 2008). Examples of fixed costs are rent and lease payments, cost of machines, monthly wages, insurance premiums, machines’ depreciation, and interest payments. The following example demonstrates how fixed costs remain constant. A company, ABC paying a rent worth $ 10,000 per month, must pay its rent despite producing or not producing goods and services. To incur cheap fixed costs, companies outsources capital goods.

  1. Variable costs

Variable costs are the only production expenses that vary based on the production volume. Due to variable costs, scholars define them as costs associated with producing goods and services (Briciu, 2008). Thus, if a company’s production increases, the variable costs increase and vice versa. Labor, commissions, packaging, electricity, raw materials, and utility expenses are examples of variable costs. For demonstration purpose, let’s assumes company ABC incurs a labour cost of $ 2 to produce one mug, then the total variable cost of producing 500 units of mugs will be $ 1000. ($2*500 units). To reduce variable costs, company produces optimum inventory.

  • Mixed costs

Mixed costs have a unique characteristic. Unlike fixed costs that remain constants and variable costs that vary, mixed costs remain fixed at a given time and change at a given time (Anderson, 2009). An excellent example of mixed cost is mortgage repayment and property leasing. If a company ABC pays, for instance, pays $ 20,000 interest for the next 48 months and after that pays $ 3,000 per month for the next 12 months, then the type of mortgage issued to the company is an example of a mixed cost. Therefore, mixed costs have both the characteristics of fixed and variable costs.

Conclusion

In conclusion, fixed costs remain constants, while variable costs vary based on the production volume, and mixed costs have both traits of fixed and variable costs. Rent payments, cost of machines, monthly wages, insurance premiums, machines’ depreciation, and interest payments are examples of fixed costs. Labor, commissions, packaging, electricity, raw materials, and utility expenses are variable costs. Balloon mortgage repayment and property leasing are prevalent examples of mixed costs.

 

 

References

Anderson, J. (2009). Determining manufacturing costs. CEP, 27-31. https://my.che.utah.edu/~ring/Design%20I/Articles/CostEstn.pdf

Briciu, S. (2008). Variable and fixed costs in company management. Annales Universitatis Apulensis Series Oeconomica1(10), 1-14. https://ideas.repec.org/a/alu/journl/v1y2008i10p14.html

 

 

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