Difference Between Fixed Cost And Variable Cost

BASIS FOR
FIXED COST VARIABLE COST
COMPARISON

Meaning The cost which remains same, regardless The cost which changes with the
of the volume produced, is known as change in output is considered as a
fixed cost. variable cost.

Nature It is related to time. It is related to volume.

Fixed costs are definite, they are incurred Variable costs are incurred only
Incurred when whether the units are produced or not. when the units are produced.

Fixed cost changes in unit, i.e. as the units Variable cost remains same, per
produced increases, fixed cost per unit unit.
Unit Cost decreases and vice versa, so the fixed cost
per unit is inversely proportional to the
number of output produced.

Behavior It remains constant for a given period of It changes with the change in the
time. output level.

Fixed Production Overhead, Fixed Direct Material, Direct Labor,

Administration Overhead and Fixed Direct Expenses, Variable
Combination of Selling and Distribution Overhead. Production Overhead, Variable
Selling and Distribution Overhead.

Examples Depreciation, Rent, Salary, Insurance, Material Consumed, Wages,

Tax etc. Commission on Sales, Packing
Expenses, etc.

Explicit And Implicit Costs

Explicit Cost
➢ Explicit Costs are the costs which involve an immediate outlay of cash from the business.
The cost is incurred when any production process is going on or an activity is conducted in
the normal course of business.
➢ The cost is a charge for the use of factors of production like land, labor, capital and so on.
They are in the form of rent, salary, material, wages, and other expenses like electricity,
stationery, postage etc.
➢ Explicit Costs show that payment has been made to outsiders, while business is carried on.
The recognition and reporting of explicit cost is very easy, because they are recorded when
they arise.
➢ Recording of explicit cost is very important because it helps in the calculation of profit as
well as it fulfills purposes like decision making, cost control, reporting, etc.

Implicit Cost
➢ Implicit Cost, also known as economic cost, is the cost which the company had foregone
while employing alternative course of action.
➢ They do not involve any outflow of cash from the business. It is the value of sacrifice made
by the entity at the time of exercising some other action. The cost occurs when an asset is
used as a factor of production by the entity instead of renting it out.
➢ As they are not actually incurred they cannot be easily measured, but they can be estimated.
They are not recorded in the books of accounts as well as these are not reported.
➢ The purpose of ascertaining the implicit cost is that it helps in decision making regarding
the replacement of any asset and many more.
➢ Implicit costs have a direct impact on the profitability and performance of the company.