## How Are Business Costs Divided? Understanding Fixed Cost and Variable Cost

If you're starting a business or analyzing your company's profitability, the first thing to understand is **not all costs are the same**. Some are fixed like a heavy stone, while others vary with market conditions. Differentiating between fixed and variable costs is not just an accounting exercise but a key to making economic decisions that impact your business's risk and return.

## What Does Fixed Cost Mean? Costs That Must Be Paid Regardless of What Happens

**Fixed costs refer to costs that do not change with fluctuations in sales or production volume**. Whether you sell 100 units or 1,000 units this month, these costs remain the same and must be paid in full.

Think of this scenario: you rent a building for your shop. Every month, the landlord charges rent. It doesn't matter if your business is booming or slow; the rent remains the same. This is a characteristic of fixed costs.

### Why Are Fixed Costs Important to Business

Fixed costs are a major burden for a business. Once you understand this structure, you can:

- **Calculate the break-even point(Break-even point)** accurately: how much you need to sell to cover fixed costs
- **Set reasonable product prices**: prices must be high enough to cover fixed costs plus variable costs and still generate profit
- **Plan cash flow long-term**: since these costs are predictable, they help in stable planning

## What Are Fixed Costs? Real-Life Examples

### Rent for buildings and premises
Whether it's an office, factory, or shop, rent is charged regularly every month.

### Employee salaries
If you hire full-time staff, they must receive their full salaries regardless of the month, even during economic crises.

### Loan interest
Money borrowed to start the business requires regular interest payments. ( Usually, the amount remains similar)

### Insurance costs
Asset insurance, transportation insurance, liability insurance—all are fixed costs.

### Depreciation of equipment and assets
When you purchase machinery or vehicles, even if not used, they still depreciate or incur maintenance costs.

### License and copyright application fees
Legal licenses, business operation rights—some are paid annually, others monthly.

## What Is Variable Cost? Costs That Increase with Production Volume

**Variable costs(Variable Cost) are costs that change with the increase or decrease in production and sales volume**. The more you produce, the higher these costs. This principle is the opposite of fixed costs.

Example: You sell dietary supplements online. This month, you sell 500 bottles; next month, 2,000 bottles. Raw materials, packaging, and shipping costs will increase proportionally with sales volume. These are variable costs.

### How to Differentiate Variable Costs

Variable costs have these characteristics:
- **Increase proportionally with production**: if production increases by 50%, these costs also increase by about 50%
- **Decrease when production drops**: during a crisis or economic downturn, you can reduce these costs by cutting production
- **Directly related to operations**: costs directly associated with manufacturing goods or providing services

## What Are Examples of Variable Costs? Details Increasing with Production

### Raw Materials (
In the food industry, raw materials are fixed costs depending on the quantity ordered. The more you buy, the higher the cost.

) Direct Labor ###
Labor working on specific projects, such as freelancers or temporary workers, costs increase with usage.

( Energy costs )
Higher production means higher electricity, water, and fuel consumption.

### Packaging and materials (
Packaging costs increase with the number of products sold.

) Shipping and delivery costs ###
More orders mean higher shipping and delivery expenses.

### Sales commissions ###
For sales teams or agents, commissions often depend on sales volume.

## The Difference Between Fixed Cost and Variable Cost: Comparison Table

| Aspect | Fixed Cost (Fixed Cost) | Variable Cost (Variable Cost) |
|------|---------|---------|
| **Stability** | Does not change regardless of sales volume | Changes with production volume |
| **Forecastability** | Easy and accurate to predict | More difficult, depends on market conditions |
| **Examples** | Rent, salaries, loan interest | Raw materials, contractual labor, shipping costs |
| **Impact on Profit** | Profit depends on sales exceeding fixed costs | Profit depends on the difference between selling price and variable cost per unit |
| **Control** | Difficult to reduce in the short term | Can be reduced by decreasing production |

## How to Analyze Total Cost When Combining Fixed and Variable Costs

Total Cost(Total Cost) = Fixed Cost + Variable Cost

Knowing the total cost is crucial because:

### 1. Pricing products
Selling price per unit must cover both fixed and variable costs, with a margin for profit. Without knowing total costs, you might set prices too low and incur losses.

### 2. Break-even analysis (Break-even Analysis)
The sales volume needed to cover all costs before making a profit. Higher total costs mean a higher break-even point.

### 3. Making additional investment decisions
For example: if direct labor costs(variable cost) are very high, you might decide to invest in automated machinery, which increases fixed costs but reduces variable costs over time.

### 4. Cash flow planning
Knowing total costs helps forecast cash needs and plan funding sources.

## Real-Life Cost Analysis Example

Suppose you run a coffee shop:

**Monthly Fixed Costs:**
- Rent: 15,000 THB
- Salaries for 2 staff: 20,000 THB
- Loan interest: 5,000 THB
- Insurance and licenses: 2,000 THB
- **Total Fixed Cost = 42,000 THB/month**

**Variable Cost per cup:**
- Coffee beans and ingredients: 10 THB
- Cup, lid, straw: 3 THB
- Gas for brewing: 2 THB
- **Total Variable Cost = 15 THB per cup**

**Selling price per cup:** 60 THB

**Profit per cup:** 60 - 15 = 45 THB
**Break-even sales volume:** 42,000 ÷ 45 ≈ **934 cups**
If you sell 1,500 cups, profit will be: (1,500 × 45) - 42,000 = 25,500 THB

## Why Is This Important?

Understanding the difference between **fixed costs** (costs that do not change) and **variable costs** (costs that change with production) is fundamental to professional business management.

Whether you're an entrepreneur, investor, or financial manager, grasping these concepts will help you:

- **Set reasonable prices** to avoid losses
- **Plan growth appropriately** by balancing fixed and variable costs
- **Assess business or project risks** more accurately
- **Make informed investment decisions** based on solid data

Once you understand your business's cost structure, you gain better decision-making power and increase your chances of success in financial management and business operations with greater stability and profitability.