The difference between a fixed expense and a variable expense lies in how each behaves in relation to activity levels or production. A fixed expense remains relatively constant and does not change with the level of activity or production. These costs are usually stable and predictable over time, often based on contracts or agreements. An example of a fixed expense is monthly rent. No matter how much business activity occurs, the rent usually stays the same each month. A variable expense, on the other hand, fluctuates directly with the level of business activity or production. As activity increases, variable expenses increase; as activity decreases, they go down. An example of a variable expense is raw materials costs. For instance, a manufacturer uses more raw materials as production increases, so the cost varies with output. To summarize:
Expense Type| Behavior| Example
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Fixed expense| Stays constant regardless of activity| Monthly rent
Variable expense| Changes in proportion to activity level| Raw materials cost
Fixed expenses provide budget stability while variable expenses offer flexibility based on business volume. Understanding this distinction helps in budgeting and cost management.