Variable cost

conventionally it is often assumed that cost can be easily separated into fixed cost and variable elements and that the variable elements behave linearly and is affected only by changes in level of activities. yet cost behavior in practice is much more complex than this simple model suggests. i need an explanation to this statement please!

Asked by: Odartey Mills 631 days ago - 2 Answers - 1802 views

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I think the distinction between fixed and variable costs are pretty clear. I think the confusion arises when fixed costs fluctuate (which is normal). You can check out the definition of fixed cost which explains this well.

“Periodic cost that remains (more or less) unchanged irrespective of the output level or sales revenue of a firm, such as depreciation, insurance, interest, rent, salaries, and wages. While, in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short-term cost accounting. Firms with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the firm as well as its pricing and profits. The breakeven point in such firms (in comparison with high variable cost firms) is typically at a much higher level of output, and their marginal profit (rate of contribution) is also much higher.”

Answer by pinyo 631 days ago
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Its not always easy to define the cost as fixed and variable. Electricity bills are fixed, rent are fixed cost.

Answer by daron 616 days ago

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