What is the difference between fixed cost or variable cost?



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As its said in the video of basic income statement that petrol,electrical bills,telephone bills as administrative expense that is fixed cost..... how is that these come under fixed cost as the expenses change depending on the number of pizzas purchased and the distance travelled and the number of calls made????? so these should come under variable cost???

1 Answer(s)


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Good question!

Typically variable costs are those that you can associate with each product being sold - in the case of pizza, costs such as vegetables, cheeses etc are variable since they are directly proportional to volume of pizza sold.

However, electricity bills, telephone bills are not directly proportional to number of pizzas sold. No matter how many pizzas you sell, the AC and lights usage is fixed (they are switched on the full day). No matter how many pizzas you sell, there is probably a monthly minimum phone bill.

Now something like petrol is a little more vague, since part of the petrol expense is variable (in the case on pizza delivery bikes the cost is directly proportional to number of pizzas sold) and part of the petrol expense is fixed (employees travel etc that is not directly proportional to number of pizzas sold). So for big companies, accountants will determine what parts of the such expenses is fixed or variable.

But as a basic cost, things like petrol, electricity etc can be treated as fixed.

Hope this is clear now.

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