Fixed costs (Fixed Costs) vs. variable costs: Your business needs to distinguish between them

In the business world, distinguishing between Fixed Cost (Fixed Cost) and variable costs is like understanding how an engine works — you can still drive without knowing, but knowing it allows for a much smoother ride because it directly impacts pricing decisions, production planning, and profit estimation.

Fixed Cost (Fixed Cost): “Expenses that stay with the business”

Fixed costs are not just numbers on the books but obligations that the company must pay regardless of how much it sells. Whether sales grow or decline this year, whether you shut down or operate normally, these expenses keep running.

Key characteristics of fixed costs

• Do not change with production volume — whether production halts or runs at full capacity, costs remain the same
• Determine the break-even point — higher fixed costs mean you need to sell more to avoid losses
• Important for pricing — forgetting to include fixed costs in your pricing can lead to selling at a loss unknowingly

Examples of fixed costs businesses face

Office and factory rent — Paying 100,000 THB per month, regardless of producing 100 or 10,000 units

Salaries of permanent staff — A team of 10 earning 200,000 THB per month, paid from day one, regardless of workload

Insurance for goods and assets — Factory insurance, product insurance, liability insurance — paid annually from the first year of operation

Depreciation of equipment and machinery — Buying machinery worth 5 million THB, renovating buildings for 3 million THB, depreciated annually whether used or not

Loan interest — Borrowing 2 million THB via credit card to expand the business, paying monthly interest even if no income is generated that month

Variable Cost (Variable Cost): “Expenses that move with the rhythm”

Unlike fixed costs, variable costs increase as you sell more and decrease when you sell less. They are directly proportional to operations.

Key characteristics of variable costs

• Flexible — increase with demand, decrease when demand drops
• Proportional to production volume — producing twice as much roughly doubles the variable costs
• Easier to control — if you want to cut costs, you can reduce variable expenses in the short term

Examples of variable costs related to production

Raw materials and components — Producing 1,000 iPhones requires 1,000 batteries; producing 2,000 requires 2,000 batteries, so costs scale accordingly

Direct labor wages — Hourly workers assembling products; busier days mean higher wages, quieter days mean lower wages

Electricity and water — Running machinery at full capacity consumes more power; operating minimally consumes less

Packaging materials — Packaging 1 million boxes for a product line requires 1 million boxes; packaging half a million units requires half a million boxes

Shipping and delivery costs — Sending 100 boxes within Saraburi costs 1,000 THB; shipping 1,000 boxes could cost up to 10,000 THB

Sales commissions — Sales staff earning 10% commission; if monthly sales are 1 million THB, commission is 100,000 THB; if sales drop to 500,000 THB, commission is 50,000 THB

Comparing fixed costs and variable costs: a clearer picture

Fixed Cost ( - “Expenses that cannot be escaped”

Fixed costs are constant operational expenses, regardless of sales volume. Examples include office rent, management salaries, equipment depreciation. These are costs you must pay every month or year. The stability of fixed costs allows companies to plan finances and forecast revenues confidently.

) Variable Cost - “Expenses that dance to the rhythm”

Variable costs change directly with sales or production volume. Examples include raw materials, direct labor, packaging, and shipping. As production increases, these costs rise; as production decreases, they fall. The flexibility of variable costs gives companies the freedom to adjust operations according to market demand.

Clear comparison table

Cost analysis: Using fixed and variable costs for better decisions

Understanding the difference between fixed and variable costs is not just theoretical but a practical tool for decision-making.

) 1. Setting reasonable prices

Knowing your fixed costs and variable costs per unit allows you to calculate the “minimum selling price” needed to break even.

Example: Your coffee shop has fixed costs of 100,000 THB/month (rent, salaries) and a variable cost per cup of 30 THB (coffee, sugar, milk). If you sell 5,000 cups per month, you need to set a minimum price of 50 THB per cup to break even. ###100,000 ÷ 5,000 + 30 = 50(

) 2. Planning investments

When deciding to buy new machinery costing 500,000 THB, ask yourself: How much can this reduce your variable costs? How many years will it take to recoup the investment?

New machinery = increased fixed costs (depreciation) but potentially reduced variable costs (less labor). If the reduction in variable costs exceeds the increase in fixed costs, investing makes sense.

( 3. Market impact assessment

If sales drop by 30%, how much will you be affected?

• Variable costs decrease by 30%
• Fixed costs remain the same

This means you need to sell enough to cover fixed costs despite lower sales.

Summary

Fixed Cost )Fixed Cost( and Variable Cost are not just accounting items but lenses that help you understand your business more deeply.

Once you know which expenses are fixed and which are variable, you can:

• Set appropriate, profitable prices
• Plan production and investments wisely
• Respond to market changes effectively
• Monitor financial health clearly

A business that understands its costs is more likely to succeed.