What distinguishes fixed costs from variable costs?

Fixed costs are costs that do not fluctuate with the level of production or sales activity within a certain range of output. This means that even if a company produces more or less, fixed costs remain unchanged over that period. Examples of fixed costs include rent, salaries of permanent staff, and depreciation of equipment. These costs remain constant irrespective of how much product is produced or sold, allowing companies to predict their expenses more reliably.

In contrast, variable costs, which are costs that vary directly with production levels, will change based on the number of units produced. As production increases, variable costs will also increase, while a decrease in production will lead to lower variable costs. The distinction is important, as understanding fixed and variable costs helps in budgeting, forecasting, and financial analysis.