Final answer:
Fixed costs are constant regardless of the level of production, while variable costs increase as production levels rise. Fixed costs are period costs, while variable costs are product costs.
Step-by-step explanation:
In the short-run perspective, a firm's total costs can be classified into fixed costs and variable costs. Fixed costs, such as rent, are incurred regardless of the level of production and remain constant in the short run. Variable costs, such as raw materials, increase as production levels rise. These costs show diminishing marginal returns, meaning that the marginal cost of producing higher levels of output increases.
With respect to predicting cost behavior, fixed costs are constant and do not change based on the number of units produced and sold, while variable costs vary depending on production levels.
When preparing financial statements, fixed costs are generally considered period costs because they are not directly associated with the production of a specific product. On the other hand, variable costs are considered product costs as they are directly related to the production of goods or services.