Costs determine a company's profitability, and both fixed and variable costs make up a company's entire cost structure. There are two main differences between fixed and variable costs: Impacted by Production Fixed costs remain constant regardless of the company's production level. Variable expenses vary directly in proportion to changes in the volume or level of activity of the company. Regardless of whether the corporation has any commercial activity, it must still pay fixed expenses. As output rises, variable costs rise, and as production falls, variable costs fall. Expenses have the characteristic of being time-related. As a result, companies know that they need to budget for those fixed expenditures since they will be due at certain times. Variable costs are related to output and quantity.

In business and finance, costs are categorised as either fixed or variable, depending on how they change with production or sales volume.

Fixed Costs remain constant regardless of output. These expenses must be paid even if a company produces nothing. Examples include rent, salaries, insurance, and loan payments. Since they don’t fluctuate with production, businesses must cover them to stay operational, making them crucial for budgeting and break-even analysis.

Variable Costs, on the other hand, change directly with production levels. Raw materials, direct labour, and shipping fees are common examples. Higher output increases these costs, while lower production reduces them. This flexibility helps companies scale efficiently but requires careful management to maintain profitability.

Understanding both cost types is essential for pricing, financial planning, and optimising profitability. A well-balanced cost structure ensures stability while allowing scalability.