## Variable costs are... and what are fixed costs? Why do businesses need to distinguish clearly

Ask yourself: this month, sales have decreased. Which costs do you still have to pay in full? And which costs can be reduced according to profit? This difference is the eye that helps the business survive. In this article, we will look clearly at what **variable costs** actually are in cost management and how they should be managed.

## When costs do not change: What are fixed costs?

**Fixed costs** are expenses that are committed to the business, regardless of whether this month you produce or sell how many units. Warehouse rent, regular employee salaries, insurance, loan interest — all must be paid in full, even if only 1 unit is sold or none at all that day.

### Characteristics of fixed costs

Fixed costs have two main advantages:

**Unchanging** — no matter how much you produce or sell, they remain the same. This means you need to calculate precisely what the selling price must be to cover these costs and still generate profit.

**Affects planning** — knowing fixed costs clearly helps the business adjust output levels wisely, whether by reducing variable costs or increasing sales to spread out these fixed costs.

### Common fixed costs in business

- **Rent** — Office, warehouse, or production space rent paid monthly or annually
- **Employee salaries** — Full-time wages paid continuously, unrelated to sales volume
- **Insurance** — Business insurance, asset insurance, liability insurance
- **Depreciation** — Cost of depreciation of buildings, machinery, equipment
- **Loan interest** — Monthly interest payments on business loans

## Variable costs: costs that move with sales

**Variable costs** are the friends that follow the rhythm of sales. As production volume increases, these costs go up; as production decreases, they go down. They are not fixed costs that must be paid regardless.

### Characteristics of variable costs

**Change with production** — These costs increase proportionally with production volume and decrease when production drops.

**Provide flexibility** — This means you can control these costs by adjusting production or procurement of raw materials to match actual demand.

### Common variable costs

- **Raw materials** — Material or component costs that increase with the number of units produced
- **Direct labor** — Wages for workers directly involved in production (which may sometimes depend on output)
- **Electricity, water** — Costs that decrease with less production and increase with more
- **Packaging costs** — Material costs for wrapping, strings, product labels, which vary with sales volume
- **Shipping costs** — Costs to deliver products to customers; higher sales mean higher shipping expenses
- **Sales commissions** — Payments to sales staff based on the sales they generate

## Fixed vs. variable costs: what's the difference?

When considering cost structure, businesses must understand that each type of cost behaves differently.

**Fixed costs** are reliable because they have no variables; they are always constant. Businesses can use these figures for budgeting and forecasting easily, e.g., knowing that next month rent will be 100,000 THB regardless of sales performance.

**Variable costs** are flexible because when sales decrease, these costs also decrease. This allows businesses to adjust production levels to match market demand.

Comparison examples:
- **Factory rent** (fixed) at 1,200,000 THB per year, whether producing 1,000 or 10,000 units
- **Raw materials** (variable) with a cost of 50 THB per unit, increasing or decreasing with the number of units produced

## Combining both: total cost analysis

Understanding just the types of costs isn't enough. Smart businesses combine fixed and variable costs to see the true total cost picture.

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

With this figure, businesses can make better decisions about:

- **Pricing** — setting prices high enough to cover total costs and generate profit
- **Production planning** — calculating how many units need to be sold to break even (Break-even point)
- **Investment decisions** — when investing in new machinery (increasing fixed costs) but reducing variable costs, how should it be approached?
- **Cost control** — identifying which costs are too high and need reduction
- **Impact assessment** — how market changes and sales volume shifts affect costs and profits

## Summary: variable costs are numbers to grasp

Distinguishing between fixed and variable costs is not just an accounting matter. It influences every decision a business makes, from pricing and production planning to major investments.

**Variable costs** are the parts you can cut back when the market is tough, while fixed costs are the ongoing operations that try to pull you down. The ability to manage both wisely is what separates sustainably growing businesses from those fighting just to survive.