What are the key differences between fixed and variable costs?

But salaries means the payments made to the permanent staff normally on administration which is not required to be increased or feasible to be decreased with level of output or activity in short term and remains same. Similarly, that part of interest payment on working capital that varies with the volume of production or services, if workable, may also be treated as variable cost.

To enhance the definition of fixed costs with real-life examples and stories, consider the following: Rent for Retail Store: Imagine a clothing store in a shopping mall. The store pays a monthly rent of $5,000, regardless of how many clothes it sells. Even if the store has a slow month with few customers, the rent remains the same. This makes rent a fixed cost. Depreciation of Machinery: A manufacturing company purchases a machine for $100,000 with an expected life of 10 years. The company will record a fixed depreciation expense each year, say $10,000, irrespective of how many products are manufactured using the machine. This annual depreciation is a fixed cost.

Fixed costs are like your rent – they stay the same, whether you use a lot or a little. Variable costs, on the other hand, are more like your grocery bill – they go up or down based on how much you buy. So, fixed costs are steady like rent, and variable costs can change, just like your grocery expenses.

Variable costs are those which vary as a result of the level of activity of a certain business, being the most obvious example that of cost of goods sold (COGS) which is a direct result of the volume of sales that are generated in a certain period. Fixed costs are a result of the infrastructure (material and human) that the organization has set in order to support its activity (i.e, to be able to sell in a certain market) and, by definition, do not vary significantly according to activity levels. Typical example of fixed costs are the depreciation of capital assets and the staff expenses of G&A support teams (e.g. finance, legal, marketing, etc.). Fixed costs will vary in a step fashion as a result of investment or downsizing decisions.

To provide concrete examples and real-life stories that illustrate the concept of variable costs, consider the following: Raw Materials in Manufacturing: A toy manufacturer needs plastic and paint to produce toys. The cost of these materials rises as more toys are produced and falls when fewer toys are made. This demonstrates how raw material costs are variable, changing with the level of production. Commissions in Sales: A car dealership pays commissions to its salespeople. The total commission expense varies with the number of cars sold. In months with high sales, commission expenses are higher, and in slower months, they decrease. This exemplifies commissions as a variable cost.

Select Data Points: Choose the periods of highest and lowest activity within a certain timeframe. Calculate Total Cost Difference: Determine the difference in total costs between these two periods. Calculate Activity Level Difference: Find the difference in activity levels (e.g., units produced) between the high and low points. Determine Variable Cost Per Unit: Divide the total cost difference by the activity level difference to get the variable cost per unit. Calculate Fixed Cost: Subtract the total variable cost at either the high or low point from the total cost at that point to find the fixed cost. This method helps in separating the fixed and variable components of mixed costs in a business.

By covering fixed costs, news organizations can focus on optimizing variable costs, leading to increased profitability. This approach enables proactive pricing strategies, attracting more viewers and boosting business volume. Therefore, understanding and managing fixed and variable costs is essential for news organizations seeking to thrive in the competitive media landscape.