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Fixed cost

CA Pravas (Job) (185 Points)

14 March 2008

Are fixed costs per unit variable in nature? If yes, why?

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2 Replies

Magesh R (Student) (53 Points)
Replied 14 March 2008

Fixed costs are those costs which are fixed in nature.

For example u rent a machine which is used for production and suppose the rent is Rs.50000. The maximum production capacity of that machine is 5000 units. So this Rs.50000 is fixed in nature.Assume in this particular year u produce only 2000 units. U dont pay lesser rent because u have produced lesser units. In next year ur production increases to 4500 units. Now also u pay the same Rs.50000.

So if u now calculate the cost per unit for both the years, u can understand the fixed cost per unit is variable.Fixed cost is not dependent on the quantum of production. Even if u dont produce the product u have to shell the fixed cost amount. Hence with higher production fixed costs gets reduced.

M.Sriram Shenoy (CA Final) (814 Points)
Replied 14 March 2008

Fixed costs are Fixed in nature. Fixed costs remains constant as a whole, but they vary per unit, because fixed costs remains fixed at any level or volume of output being produced.Hence, larger output reduces fixed cost per unit.

For eg. If staff salary expenses per month is, say, Rs.10000.00 and your production during that month is, say, 1000 units.Now fixed cost per unit would be Rs.10(Rs.10000/1000 units).

Taking the same instance,if during the next month units produced is, say, 2000, now fixed cost per unit would be Rs.5(Rs.10000/2000 units).This is because at any level or quantum of production, fixed costs stay fixed.