Question

What is the difference between a fixed cost and a variable cost and why are both of these costs important to the accounting process?

Answer 1

Ans: Within a relevant range of activity, Fixed cost remains constant irresective of the units produced while variable cost changes with the change in activity level. Fixed costs are unavoidable costs whereas variable costs are considered avoidable costs. Examples of Fixed costs include rent, salaries, loans, etc. whereas variable costs can be represented by direct labor, operating expenses, taxes, etc.

Both fixed cost and variable cost hold immense importance in the accounting process as a comprehensive knowledge of these costs in a company helps the accountants and managers in performing breakeven analysis, responding to the changing factors by making changes in cost structure, avoiding unnecessary expenditure and planning for future.