Fixed and variable costs

The costs that do not with output are defined as fixed costs.These costs will exist even if no output is produced.For example,interest on borrowed capital,rental expenses on leased plant or building,depreciation charges associated with the passage of time,salaries of employees who cannot be laid off during periods of reduced output are fixed costs.On the other hand,costs that very with changes in output are known as variable costs.They are function of the of output level.For example,expense on raw materials,wages,depreciation associated with the use of equipment,sales commissions,and the costs of all inputs that very with output are variable costs.Since all the factors are variable in the long run,so are all costs.
Such a sharp distinction between fixed and variable costs is not always realistic.For example,a salesman's salary might be fixed within a certain range of output,but below a lower limit he might be land off,while above the upper limit additional salesman would be hired.This problem led to the development of semi-variable cost concept.The semi-variable costs are fixed if incremental output does not exceed certain limits,but are variable outside these bounds.
The distinction between these cost concepts is useful in decision making.For example,in the short run a profit maximising firm will continue its operation so long as its total variable cost is covered but in the long run all costs must be covered.