What is the difference between fixed costs and variable costs?

Fixed costs are expenses that do not change in relation to the level of production or sales within a certain range of activity. This means that whether a company produces one unit or a thousand units, certain costs—such as rent, salaries of permanent staff, and insurance—remain constant. This characteristic is crucial for businesses, as it allows for budgeting and financial planning, knowing that these costs will not fluctuate with changes in production volume.

In contrast, variable costs increase or decrease depending on the amount of goods or services produced. For instance, costs like raw materials or direct labor can change significantly as production scales up or down. Understanding this concept is important for managing a business's operational structure and overall financial health, as it impacts pricing strategies, profit margins, and financial forecasting.