The answer is important to know, and it just may surprise you. Fixed expenses cost the same amount each month. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year. It's much easier to budget for fixed expenses than it is to budget for a variable expense or discretionary expense.
Typical household fixed expenses are mortgage or rent payments, car payments, real estate taxes and insurance premiums. While you could theoretically change your monthly mortgage payment by refinancing your loan or by appealing your property tax assessment, this is not an easy switch.
The same is true if you pay rent. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes. Your health insurance , car insurance , life insurance and homeowners or renters insurance are also examples of fixed costs. You would have to spend several hours researching alternate plans to change these monthly payment amounts.
If you lose your job or aggressively want to start saving, you could devote a few hours to culling your fixed expenses.
Since fixed expenses typically represent the biggest chunk of your budget, the money you save in this category can be quite substantial. Shopping around for a cheaper health insurance premium or a less expensive cellular phone plan will only require a few hours of your time each year. Variable expenses represent those daily spending decisions like eating at restaurants, buying clothes, drinking Starbucks and playing a round of golf with your buddies.
Rather, they're "variable" because the amount that you spend differs from month to month. While most variable costs represent discretionary spending such as restaurants, Starbucks and golf , some variable costs represent necessities. Most families, for example, spend variable amounts of money on groceries each month.
In addition, you're likely to spend different amounts each month on putting gasoline in your car and paying for necessary car repairs and maintenance. Variable costs are usually the first expenses that people try to cut when they need to start saving money. Unfortunately, variable costs are also some of the toughest expenses to cut back on, because doing so requires a daily commitment to frugal decision-making.
Trimming a fixed cost, like your cell phone plan, insurance , or your cable package, requires only making a decision once, and then living with that decision for the next several months or years.
Trimming variable costs, on the other hand, requires actively making multiple decisions every day about whether or not to buy certain items or participate in specific events. Behavior It remains constant for a given period of time. It changes with the change in the output level. The cost which remains constant at different levels of output produced by an enterprise is known as Fixed Cost. They are not affected by the momentary fluctuations in the activity levels of the organization. Fixed Cost remains constant does not mean that they are not going to change in future, but they tend to be fixed in the short run.
This can be explained with an example, If your company is operating the business in a rented building, so whether you produce tons of output, or you produce nothing, you have to pay the rent of the building, so this is a fixed expense which is constant over a period until the rent of the building increases or decreases. Fixed cost will be same in total but changes in per unit. To explain this, we have an example If the fixed cost is Rs.
Now, in this situation, what you can see is, the total fixed cost is unchanged in all the three-quarters, but the unit fixed cost in the first quarter is Rs. The cost which changes with the changes in the quantity of output produced is known as Variable Cost.
They are directly affected by the fluctuations in the activity levels of the enterprise. Variable cost varies with the variations in the volume, i. The Variable cost is directly proportional to the units produced by the enterprise. Now, variable cost remains same in per unit, but changes in total. You can understand this with an example , i. You might wonder that the output level is changed in all the three-quarters, so the variable cost will also change, but only in the total amount but not in the unit price.
The following point are substantial, so far as the difference between fixed cost and variable cost in economics is concerned:. Now, from the discussion mentioned above, it might be clear that the two costs are perfectly opposite to each other, and they are not same in any respect. Having a baseline budget can be helpful if you lose your job or work in the gig economy. Keeping that amount in mind can help you decide how much of your budget you can afford to dedicate to discretionary variable expenses.
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