## Fixed Costs vs Variable Costs: Why Managers Need to Distinguish Them

If you are a business manager and still do not understand the difference between these **two types of costs**, you might make incorrect decisions regarding pricing, investment, and business expansion. This article will clearly explain which costs are controllable and which are not, and how to leverage both types to ensure sustainable business growth.

## What Are Fixed Costs: Expenses That "Stay with" Your Business

**Fixed costs** are expenses that a business must pay regardless of sales volume or even if no products are produced. Characteristics of these costs include:

- **Do not change with sales volume** - whether you sell 10 or 1,000 units, these expenses remain the same
- **Must be paid continuously** - they are contractual or agreed-upon obligations
- **Are stable** - making budgeting and planning easier

### Types of fixed costs that businesses face

**Office rent or mortgage** - whether there are customers this month or not, rent must be paid in full

**Salaries of management and permanent staff** - fixed employees receiving monthly salaries regardless of sales fluctuations

**Business insurance** - property insurance, liability insurance, product insurance, etc., paid regularly to mitigate risks

**Depreciation of machinery and equipment** - older equipment still depreciates monthly

**Loan interest** - if you borrow money, interest must be paid as scheduled, regardless of sales

**Some utility costs (** - server hosting, system maintenance, business landline phone bills

The importance of understanding fixed costs lies in financial planning. Knowing how much you need to pay each month helps determine how many units you must sell to break even, which is fundamental for setting reasonable prices.

## What Are Variable Costs: Expenses That Change According to the Situation

**Variable costs** are expenses that increase or decrease with production and sales volume. The more you produce, the higher these costs; the less you produce, the lower. Characteristics include:

- **Change with production and sales volume** - increased production = higher costs, decreased production = lower costs
- **Flexible** - you can adjust these costs by changing production levels
- **Directly related to revenue** - the more you sell, the higher the variable costs

) Examples of variable costs in various businesses

**Raw materials and components** - making 100 cakes requires more flour, eggs, sugar, whereas making 50 requires less

**Direct labor** - workers paid based on units produced or hours worked

**Energy and water costs** - higher production months lead to higher electricity and water bills, lower months lead to lower bills

**Packaging materials** - wrapping, labeling each item; higher production means more material used

**Transportation and shipping costs** - selling 100 units this month costs 1,000 THB in shipping; next month, selling 50 units costs 500 THB

**Sales commissions** - sales staff paid a percentage of sales; more sales mean higher commissions

**Advertising and promotional costs** - to increase sales, advertising expenses must increase accordingly

Variable costs provide flexibility for businesses because when sales decline during economic downturns, you can reduce production and lower these costs, helping the business survive longer.

## Fixed Costs vs Variable Costs: A Clear Comparison Table

| Criteria | Fixed Costs | Variable Costs |
|---|---|---|
| **Change with production volume** | No | Yes |
| **Examples** | Rent, salaries, insurance, interest | Raw materials, wages, packaging, shipping |
| **Stability** | Stable, predictable | Fluctuate, market-dependent |
| **Controllability** | Difficult to adjust quickly | Can be adjusted by changing production levels |
| **Time frame** | Usually long-term and short-term | Short-term, production-dependent |
| **Impact on profit** | More sales = lower cost per unit | More sales = higher total costs |

## Leveraging Both Cost Types: Practical Strategies

**For pricing** - Businesses need to cover both fixed and variable costs. When setting a price of 100 THB per product, consider how much of the fixed and variable costs are involved; leave the calculation to the experts.

**For investment decisions** - Is your direct labor cost high? You might consider investing in machinery, which increases fixed costs but reduces variable costs.

**For cost control** - Regularly review whether fixed costs are rising. If so, renegotiate leases or find ways to reduce them. For variable costs, seek new suppliers or improve production processes.

**For growth planning** - If you want to expand production, calculate both cost types. Fixed costs may increase, but the variable cost per unit could decrease due to economies of scale.

## Break-even Point ###Break-even Point(: Why You Must Know It

The break-even point is the sales volume at which total revenue equals total costs. Beyond this point, profits begin. Calculating the break-even point requires both fixed and variable costs:

**Break-even = Fixed Costs ÷ )Selling Price per Unit - Variable Cost per Unit(**

Example: If fixed costs are 50,000 THB/month, selling price per unit is 500 THB, and variable cost per unit is 300 THB, you need to sell )50,000 ÷ (500 - 300)( = 250 units per month to break even.

Knowing the break-even point helps you plan marketing, advertising, and expansion strategies effectively.

## Summary: Why Businesses Must Differentiate Cost Types

Understanding the difference between **fixed costs** and **variable costs** is not just an accounting matter; it is a key to making correct business decisions. From pricing and cost control to equipment investment and sustainable growth planning, this knowledge is essential.

Businesses that understand and manage their costs appropriately are more likely to avoid failure and improve competitiveness. Starting today, try calculating and distinguishing your business costs—you might discover opportunities to save costs and increase profits.