Question

How do fixed and variable costs behave? Why is it understanding their behavior so important when analyzing costs?

Answer 1

Answer

--Fixed Cost and Variable costs behave very differently.

--Variable costs are those cost that are variable in nature, meaning that they 'change' with the level of output.
--Fixed costs are those cost that do not change with the level of output.

--Moreover, variable cost remains same on 'per unit' basis, while FIxed Cost remains same in totality.

--Summary:

Variable cost	Fixed Cost
>Changes in total with change in level of output	>Stays the same in total
>remains the same on 'per unit' basis with the change of level of output	>changes 'per unit' with a change in level of output

--Their behaviour is important because FIXED COST is not generally considered in cost accounting decision unless the fixed is avoidable. Fixed cost, in general, does not affect decision making.