## Which of the following is a fixed cost? About cost systems that managers need to know

In business management, distinguishing **which is a fixed cost** and variable costs is not just an accounting theory but an essential skill that determines the survival and growth of a company. Managers who do not understand the cost structure often fall into the trap of poor decision-making, such as setting prices too low or investing in unnecessary assets.

## What is a fixed cost? The relentless force of business

**Fixed Cost (Fixed Cost)** refers to expenses that must be paid every month, every quarter, every year, regardless of how much the company sells or even if it sells nothing at all. These are stable burdens that must be paid until the company releases them.

A characteristic of fixed costs is **unchanging**. Whether production increases by 10% or decreases by 50%, these costs remain the same as a rock blocking the fire, requiring the company to always plan financially around them.

## Full examples of fixed costs in real business

### Rent for the workspace
Whether you have many customers or close the doors with no one entering, the monthly rent remains a burden. Be it a house, office building, or warehouse—these costs are not flexible at all.

### Salaries of permanent employees
Full-time employees and management must be paid regardless of whether that month’s production is high or low. Small or large processes, the salary still flows out of the bank account as usual.

### Depreciation of machinery and equipment
When a company purchases machinery or equipment, what follows is **depreciation**, which is a fixed accounting cost recorded monthly, whether the machinery is heavily used or idle.

### Business insurance premiums
Companies need to pay for insurance to mitigate various risks, whether property insurance, liability insurance, or others. These costs are fixed amounts payable regularly.

### Loan interest
If a company borrows money from a bank, the interest payable does not depend on sales performance. It is a fixed number that must be paid on the due date.

### Maintenance and repair costs
Offices, factories, and equipment require upkeep. These expenses are usually consistent and fixed to keep assets operational.

## What is a variable cost? The changing friend of fixed costs

**Variable Cost (Variable Cost)** is the opposite. It is a cost that varies with the level of production or sales. The more you sell, the higher the cost; the less you sell, the lower the cost. This is something you can control and adjust at will.

### Common examples of variable costs

**Raw materials and supplies**
The more products a company manufactures, the more raw materials it needs to purchase. If not producing, raw materials are not ordered.

**Direct labor**
Workers paid hourly or per piece will incur more wages as production increases.

**Packaging and wrapping costs**
Products require wrapping and packaging. These costs depend on the number of items sold.

**Transportation and shipping costs**
The more goods to be shipped, the higher the transportation costs.

**Sales commissions**
Sales staff earning commissions based on sales performance will earn more as sales increase.

**Energy and water costs**
Electricity and water used in production increase with the volume of output.

## The difference between fixed and variable costs that managers must know

| Feature | Fixed Cost | Variable Cost |
|--------|--------------|--------------|
| **Change** | Does not change with production volume | Changes with production volume |
| **Flexibility** | No flexibility; paid the same always | Highly flexible; can be adjusted |
| **Examples** | Rent, salaries, interest | Raw materials, wages, transportation |
| **Impact on profit** | When sales are low, fixed costs "consume" more profit | When sales are low, variable costs decrease |
| **Planning** | Requires careful planning; limited options | Flexible management and adjustment |

## Combining both types of costs for smart management

Total cost = Fixed costs + (Variable cost per unit × Number of units produced)

This simple formula explains the magnitude of total expense burden.

### Why is knowing total costs essential for business decisions?

**Proper pricing**
If a company only knows variable costs, it might set prices too low. If it cannot sell enough to cover fixed costs, it will incur losses.

**Break-even point (Break-even Point)**
The company can calculate how many units need to be sold to cover all costs. Selling beyond that point begins generating profit.

**Deciding on business expansion**
To expand production, managers need to know whether fixed costs will increase and how variable costs per unit will change.

**Cost control**
Analyzing both types of costs helps identify areas with the highest waste and where to cut or improve.

**Financial planning**
When customers demand large quantities, variable costs increase, but fixed costs can be spread out, leading to higher profit per unit.

## Smart cost management strategies for modern managers

### Reducing fixed costs
Reducing fixed costs is not easy but possible through methods such as:
- Switching from renting to shared workspace (co-working space)
- Reducing the number of managers (difficult but sometimes necessary)
- Refinancing to improve loan interest rates

### Controlling variable costs
- Improving production processes to reduce waste
- Negotiating better prices with suppliers
- Minimizing raw material loss during manufacturing
- Using technology to enhance production efficiency

### Increasing sales volume to spread fixed costs
As sales increase, fixed costs per unit decrease. This is called the "economies of scale."

## Summary: The importance of distinguishing costs

**Which is a fixed cost?** The answer is clear—it is something that must always be paid, regardless of whether the business sells products or not. Understanding the difference between fixed and variable costs is not just an accounting matter but a matter of survival and success in the industry.

Smart managers will use this knowledge to set appropriate prices, plan production, evaluate investments, and ultimately increase company profits. This article aims to help you understand your business’s cost structure more deeply.