Fixed Costs and Variable Costs

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ACCOUNTING Question 1 Fixed costs do not change with the change in the level of activity in the short run. On the other hand, variable costs refer to the cost of elements, which tend to change with the change in the level of activity. Fixed cost remains the same, regardless of the volume produced, while variable cost changes with the change in output. Fixed cost is time-related, while the variable cost is volume-related. Fixed costs tend to be definite, and they are incurred whether the units are produced or not. Variable costs are incurred only when the units are produced. The fixed cost changes in a unit, i.e., as the units produced increase, the fixed cost per unit will decrease and vice versa, implying that the fixed cost per unit tends to be inversely proportional to the number of output produced. Conversely, the variable cost remains the same per unit. While fixed costs remain constant for a given period, the variable cost will constantly be changing with the change in output level. Fixed costs entail a combination of fixed production overhead, fixed selling and distribution overhead, and the fixed administration overhead.

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