How do fixed costs differ from variable costs in a business?

Fixed costs are expenses that remain unchanged regardless of the level of production or sales within a certain range of activity. This means that whether a business produces a high volume of goods or none at all, the fixed costs, such as rent, salaries of permanent staff, and insurance, will stay the same. This stability allows businesses to budget and forecast more effectively since these costs do not fluctuate in response to the direct output or sales volume.

In contrast, variable costs are those that do fluctuate with production levels. As more goods are produced, the variable costs, such as raw materials and direct labor, increase. Therefore, understanding the character of fixed costs is crucial for financial planning and operational efficiency, as they represent the stable overhead expenses that a business must cover regardless of its performance in the marketplace.