Fixed Costs and Variable Cost

Fixed cost
Fixed costs are business expenses that are not dependent on the level of goods or services
produced by the business. For example labour costs are classified as fixed costs, as you know
labour costs are the sum of all wages paid to employees, as well as the cost of employee
benefits. Then we have another example, that would be storage costs, because the price that you
pay for storage doesn´t increase or decrease by the company's profits or losses and as a last
example we have administrative costs; administrative costs are assigned a fixed cost by nature
because they are often difficult to reduce and these costs exist regardless of the level of sales
that occurs.

In the three examples, you can see that costs don´t change if the company has had losses or
profits.

Therefore, fixed costs are costs that do not vary with changes in the volume of sales or the level
of production.

Variable cost
Variable costs are those costs that vary depending on a company's production volume; they rise
as production increases and fall as production decreases. For example, the costs of production
will depend on how much you produce. It´s the same case with advertising, distribution and
selling costs.

If you have a company you need to know about variable and fixed cost to have a good
accounting of your company or in the company that you work because both costs make up the
total cost.

Finally to consider all costs within a company, we are going to analize the Coca Cola Co.

Coca Cola works with a lot of advertising companies and it has announced by all means of
communication like newspapers, tv, radio,etc. Coca cola spend spends an average of 2.5 billion
of dollars. Its cost of advertising is one of the biggest in the market.

All employees earn the same according to the contract that they signed. The salary depends on
the employee's position and don’t change for the earnings or losses. It´s a fixed cost.

Coca Cola Co. produce a lot of products, this means that its cost of production is one of the
highest in the world. Furthermore, Coca cola have a very high amount of administrative costs,
but for Coca Cola Co. it is a little problem because they have great earnings.

Distribution costs and selling costs are conformed for the transportation of the products, for the
sales contracts, etc. Both are variable costs. It means that the costs don´t depend of the volume
of sales of the products.

Coca Cola Co. bought stores to store its products because they tried to reduce the storage costs.