What is the difference between fixed costs and variable costs?

The distinction between fixed costs and variable costs is fundamental to understanding business finance and budgeting. Fixed costs are expenses that do not change in direct relation to the level of production or sales. These costs remain constant over a certain range of production levels, meaning that even if production increases or decreases, these expenses will stay the same. Examples of fixed costs include rent, salaries of permanent employees, and insurance.

On the other hand, variable costs fluctuate with the level of production. As production increases, variable costs will typically rise, while decreasing production will lead to lowered variable costs. Common examples of variable costs include raw materials, direct labor costs associated with production, and utilities tied directly to production levels.

The correct answer highlights that fixed costs remain constant irrespective of production volume, while variable costs are inherently tied to and will change with production levels. This understanding is crucial for effective cost management and financial planning within a business.