Fixed vs Variable Costs - Definition
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Fixed and Variable Costs Definition
Costs are expenses that an individual or business must pay as part of operations. Fixed costs are a stated amount over a period of time. They do not vary or fluctuate based upon the level of production or output. Variable Costs vary based upon the level of production or output. They are the costs most directly related to the process of producing a good or service. As such, as output increases, these costs also increase.
A Little More on Fixed and Variable Costs
The percentage of fixed to variable costs incurred will vary based upon the nature of the business's operations and industry. For example, a power producer has very high fixed costs for infrastructure compared with the unit cost of energy. Similarly, a professional services firm has high fixed costs in the form of salaries compared to the cost of providing services to clients. A restaurant will have high variable costs (food and drink) that vary based upon the amount of sales. Similarly, a product business may incur high variable costs that will vary based upon the number of units produced.
Academic Research on Fixed and Variable Costs
On the association between operating leverage and risk, Lev, B. (1974). Journal of financial and quantitative analysis,9(4), 627-641. On the allocation of fixed and variablecostsfrom service departments, Balachandran, B. V., Li, L., & Magee, R. P. (1987). Contemporary Accounting Research,4(1), 164-185. Coststickiness and core competency: A note, Balakrishnan, R., & Gruca, T. S. (2008). Contemporary Accounting Research,25(4), 993-1006. Coordinating inventory control and pricing strategies with random demand andfixedorderingcost: The finite horizon case, Chen, X., & Simchi-Levi, D. (2004). Operations Research,52(6), 887-896. Determining where to shop:Fixedandvariablecosts of shopping, Bell, D. R., Ho, T. H., & Tang, C. S. (1998). Journal of Marketing Research, 352-369. Predation and the logic of the averagevariable costtest, Baumol, W. J. (1996). The Journal of Law and Economics,39(1), 49-72. Variable costallocation in a principal/agent setting, Magee, R. P. (1988). Accounting Review, 42-54. Howcostaccounting distorts product costs, Cooper, R., & Kaplan, R. S. (1988). Strategic Finance,69(10), 20. The role offixedcosts andcostcomplementarities in determining scope economies and thecostof narrow banking proposals, Pulley, L. B., & Humphrey, D. B. (1993). Journal of Business, 437-462. Minimum quality standards,fixedcosts, and competition, Ronnen, U. (1991). The RAND Journal of economics, 490-504. Global andvariable costmanufacturing systems, Rosenfield, D. B. (1996). European Journal of Operational Research,95(2), 325-343. An axiomatic approach to the allocation of afixed costthrough prices, Mirman, L. J., Samet, D., & Tauman, Y. (1983).The Bell Journal of Economics, 139-151.