What differentiates fixed costs from variable costs?

Fixed costs are those expenses that do not change regardless of the level of production or sales within a certain range. Examples include rent, salaries, and insurance. These costs remain constant over time, which is crucial for businesses to understand when forecasting budgets and making long-term financial decisions.

On the other hand, variable costs change in direct proportion to the level of production. This means that as more products are made, the variable costs will increase, and if production decreases, those costs will fall accordingly. Common examples of variable costs are materials used to produce goods and direct labor that varies with the amount of production.

Understanding the distinction between fixed and variable costs is important for profit analysis, pricing strategies, and budgeting processes, as it can significantly affect financial planning and decision-making processes within a company.