Business costs are divided into two categories: what are fixed costs, and what are variable costs?

Any business must face the choice between fixed costs and variable costs according to production. Classifying these costs is fundamental knowledge that entrepreneurs need to understand deeply because it determines how to set product prices, how many units to produce to break even, and whether large investments are worthwhile. This article will help you understand the differences between Fixed Costs and Variable Costs and how to use this information for business decision-making.

What Are Fixed Costs (Fixed Cost)

Fixed costs are expenses that a business must pay every month or year regardless of how much is sold or if nothing is sold at all. These costs remain the same, similar to a burden that follows the business regardless of the period.

A key characteristic of fixed costs is that they do not change with the volume of production or sales. Whether the business makes a profit or incurs a loss, these costs must still be paid in full. Managing fixed costs effectively is therefore crucial for budgeting and profit forecasting.

###What Are Fixed Costs

Rent is the clearest example of fixed costs. Whether the factory operates at full capacity or not, rent must be paid according to the contract.

Salaries of management or administrative staff are not dependent on sales volume; they must be paid in full every month, unlike direct labor costs in production which may vary.

Insurance for buildings and equipment is a regular expense paid to mitigate risks.

Depreciation of machinery and buildings is an annual accounting allocation of initial investment costs.

Loan interest that the business pays to creditors, regardless of profit or loss.

Basic utilities such as internet and office phone fees, which have fixed monthly charges.

These fixed costs—from rent to management salaries—play a role in determining the break-even point, i.e., the number of units that must be sold to cover costs or start making a profit.

What Are Variable Costs (Variable Cost)

Variable costs are expenses that increase or decrease in proportion to the volume of production or sales. The more you produce, the higher these costs; the less you produce, the lower they are.

Variable costs offer greater flexibility than fixed costs because they can be adjusted based on market demand and production efficiency.

###What Are Variable Costs

Raw materials and components are the primary variable costs for manufacturing businesses. The more units produced, the more raw materials need to be purchased.

Direct labor for tasks such as polishing or assembling parts depends on the production volume. Some businesses pay per piece rather than monthly wages.

Energy and water used in the manufacturing process increase with production volume. Machinery usage varies according to output levels.

Packaging and wrapping materials for products sent to customers, including boxes, plastics, and other packing supplies.

Shipping costs for delivering products to customers, which increase with the number of orders.

Commissions paid to salespeople based on sales volume they generate.

These variable costs can be controlled by sourcing more suppliers, optimizing production techniques to save materials, or choosing cheaper packaging options.

The Difference Between Fixed and Variable Costs

Clearly distinguishing which costs are fixed and which are variable helps entrepreneurs make informed decisions about investments, production planning, and pricing.

Fixed costs are stable and unchanging, suitable for calculating the basic costs of a business. However, if sales are low, fixed costs still need to be paid in full—such as rent, management salaries, and depreciation—reducing profit per unit.

Variable costs are flexible and can be adjusted according to circumstances. If the business can reduce these costs—like raw materials, direct labor, packaging, and shipping—the total costs decrease. This can be achieved by improving production efficiency or negotiating better prices with suppliers.

Combining Fixed and Variable Costs to Analyze Total Cost

Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units Produced)

For example, if a factory has fixed costs of 100,000 THB, a variable cost per unit of 50 THB, and produces 1,000 units, then the total cost is 100,000 + (50 × 1,000) = 150,000 THB. The cost per unit is therefore 150 THB.

###Using Cost Data for Decision-Making

Pricing should be set above the unit cost to ensure profit.

Production planning should start with calculating the break-even point to know how many units need to be sold to cover costs.

Investment decisions may involve additional spending on new machinery to reduce long-term variable costs.

Cost control involves identifying weak points in variable costs and working to reduce them.

Market impact assessment: if the market downturns, the business can reduce production to lower variable costs, while fixed costs remain as obligations.

Summary

Understanding what are fixed costs and what are variable costs is fundamental to effective business management. Fixed costs provide stability but also represent ongoing obligations, while variable costs offer flexibility but require careful management. Deep knowledge of cost structure helps entrepreneurs compete better, sustain their business longer, and grow sustainably.