Final answer:
Fixed costs are unchanged in relation to production levels, such as rent, insurance, and salaries, while variable costs fluctuate, like direct labor and materials. Total costs are the summation of both fixed and variable costs. Businesses must consider both when assessing their financial performance.
Step-by-step explanation:
Understanding Fixed and Variable Costs
When analyzing business expenses, it is crucial to distinguish between fixed costs and variable costs. Fixed costs are expenses that do not change with the level of production or services provided. Examples include rent on a factory or a retail space, insurance, salaries for permanent staff, depreciation of assets, and potentially some forms of advertising and marketing. These costs are consistent whether a business produces a large or small quantity of goods or services.
Variable costs, on the other hand, fluctuate with the level of production. These can include costs for materials, direct labor hours, sales commissions, and utilities used in production. For instance, a business like 'The Clip Joint' barber shop experiences variable costs that change with the number of barbers hired, as the cost is dependent on the daily wage multiplied by the number of barbers.
To determine total costs, one must add fixed and variable costs. This sum will give a complete picture of the costs incurred by a business at various levels of production. For example, at 'The Clip Joint,' if two barbers are hired for the day at $80 each, and fixed costs are $160 per day, the total cost for the day would be $160 (fixed) + $160 (variable) = $320.