If the company produces 5,000 T-shirts in a month, the total variable cost for that month would be $20,000 ($4 per T-shirt * 5,000 T-shirts). Therefore, the variable cost per T-shirt is $4 ($2 for fabric + $1 for dye + $1 for printing). The company also pays a printer $1 per T-shirt for printing designs. Now, for each T-shirt produced, the company uses $2 worth of fabric and $1 worth of dye. So, the total fixed costs for this business are $30,000 per month ($10,000 for rent + $20,000 for salaries). Again, this cost does not change with the number of T-shirts produced. It’s a fixed cost.Īdditionally, the business has a full-time staff with monthly salaries totaling $20,000. This cost remains the same regardless of how many T-shirts are produced. Let’s say the business rents a warehouse for production at a cost of $10,000 per month. Let’s consider a simple example using a T-shirt manufacturing business: Example of the Difference Between Fixed Cost and Variable Cost Understanding the difference between fixed and variable costs is crucial for various business decisions and financial analyses, including pricing, profitability analysis, budgeting, and break-even analysis. Per-unit cost: Fixed costs decrease on a per-unit basis as output increases (because the same total amount is spread over more units), while variable costs remain constant on a per-unit basis (because each additional unit incurs the same cost).Behavior relative to output: Fixed costs remain the same in total regardless of output levels, while variable costs change in direct proportion to output levels.Utilities related to production machinery.

They are constant per unit but vary in total when production levels change. Variable costs are expenses that change in total proportionally with the level of business activity or production volume. Depreciation of equipment (using straight-line method).They are “fixed” in total but vary per unit of output when production levels change. These costs are incurred even if the business produces nothing at all. Difference Between Fixed Cost and Variable Costįixed costs and variable costs are two categories of business expenses that behave differently relative to the level of business activity or production volume.įixed costs are expenses that do not change in total over the short term, regardless of the level of output.

Fixed cost and variable cost