Describe the concept of fixed cost, variable cost and total cost.

Describe the concept of fixed cost, variable cost and total cost.
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1 Answer

Answer :

Total cost 

Total cost refers to total expense incurred in reaching a particular level of output, if such total cost is divided by quantity produced average or unit cost is obtained. The total cost includes both the variable cost (that varies with the change in the total output) and the fixed cost (that remains fixed irrespective of the change in the total output). Thus, total cost includes the cost of all the input factors used for producing a certain level of output.


Fixed Cost 

A cost that remains constant within a given period of time and range of activity in spite of fluctuations in production. Per unit fixed cost varies with the change in the volume of production. If the production increases, fixed cost per unit decreases and as there is decrease in production, the fixed cost per unit increases. Rent and insurance of building, depreciation on plant and machinery, salary of employees etc., are some examples of fixed costs.


Variable cost 

Variable costs are those cost which vary directly in proportion to change in volume of production/output. The cost which increases or decreases in the same proportion in which the units produced is termed as variable cost. Direct material, direct labour, direct expenses, variable overheads are some examples of variable cost.

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