How are fixed costs separated from variable costs?

Fixed costs are those that do not change with the level of production or sales. They are incurred regardless of the level of activity. Examples of fixed costs include rent, salaries, depreciation, and insurance.

Variable costs, on the other hand, are those that change in proportion to the level of production or sales. Examples of variable costs include the cost of raw materials, direct labor, and sales commissions.

The difference between fixed and variable costs is important for a number of reasons.

* Fixed costs are a sunk cost. Once they have been incurred, they cannot be avoided. This means that managers need to be very careful when making decisions that will affect fixed costs.

* Variable costs can be controlled. Managers have more control over variable costs than they do over fixed costs. This means that they can take steps to reduce variable costs when necessary.

* The ratio of fixed to variable costs determines a company's cost structure. A company with a high proportion of fixed costs is more sensitive to changes in production or sales volume than a company with a low proportion of fixed costs.

By understanding the difference between fixed and variable costs, managers can make better decisions about how to use their resources.

Here is a table that summarizes the key differences between fixed and variable costs:

| Feature | Fixed Costs | Variable Costs |

|---|---|---|

| Definition | Costs that do not change with the level of production or sales | Costs that change in proportion to the level of production or sales |

| Examples | Rent, salaries, depreciation, insurance | Cost of raw materials, direct labor, sales commissions |

| Sunk cost | Yes | No |

| Control | Low | High |

| Impact on cost structure | High | Low |