Fixed and Variable Costs

Fixed costs don’t change with output. Rent on a factory, business rates, manager’s salaries and the cost of new machinery are fixed costs. When output increase, a business makes more use of the facilities it’s got – the cost of those facilities does not change. Indirect costs can’t be directly linked to only one product or service.

Variable costs rise and fall as output changes. Hourly wages, raw materials and packaging costs for each product are variable costs. Direct costs are directly linked to a product or service.