Fixed and variable costs

Welcome to our session on fixed and variable costs, an essential topic in managerial and financial accounting. Understanding how costs behave is fundamental for managers making decisions about pricing, production and profitability. Fixed and variable costs are the primary ways we classify business expenses, and this distinction supports budgeting, forecasting and strategy. Recognizing the difference allows managers to analyze how activity levels impact total costs and the bottom line. In this session, we'll explore what these terms mean, why they matter, and how to use them in decision making. Fixed costs are expenses that remain unchanged, regardless of output within a relevant range. Examples include rent, insurance, and salaried administrative staff. Even if nothing is produced, these costs persist. In contrast, variable costs fluctuate directly with output or sales, such as direct materials, manufacturing labor or fuel for deliveries. Understanding the distinction between fixed and variable costs is crucial for effective decision making as managers need to identify which costs change with activity levels and which remains stable. Distinguishing fixed and variable costs is crucial for decision making tools like break even analysis and contribution margin calculations. Knowing variable cost per unit and total fixed costs lets you determine the break even point. The units needed to cover all expenses. For example, selling chairs at 100 pounds each with