Fixed Costs and Variable Costs: what are the differences?
Imagine you are running a lemonade stand. To run your business, you need to know two things: the fixed costs and the variable costs associated with your product. What is a fixed cost? A fixed cost is an expense that is independent of sales volume. For your lemonade stand, the fixed costs are rent, wait staff salaries, advertising, electricity, phone bill, etc. To schematize, all these charges at the second level of the income statement. Let's say your fixed costs are sixty francs a day. On your first day on the job, it doesn't matter if you sell a glass of lemonade or a hundred: the fixed costs won't change. In reality, in practice, the fixed costs increase step by step. In addition, fixed costs are often referred to as overheads or ACEs (other operating expenses). Of course, if you decide to open a second booth on your second day, your fixed costs will change. Visit also: Outsourced accounting services firms in Canada What is a variable cost? Variable costs a...