A fixed cost is one that must be expensed regardless of the number of units that are produced. A variable cost is the incremental cost of producing each item. Fixed costs are generally stable over a relevant range. For example, say an ice cream production company builds a plant that can create 12,000 gallons of ice cream per day. For the production of 1 to 12,000 gallons per day, the fixed costs are the same. However, if the company wants to produce 14,000 gallons of ice cream per day, they will have to add on to the current facilities or build a new plant, and the fixed costs will increase.
In a manufacturing environment, fixed costs usually include the equipment used in productions, the salaries of the sales, administrative, and support staff, and the land and buildings owned by the company. The variable costs include the materials, the salaries of the production workers, and transportation costs for the products.
In a service environment many employee salaries are fixed because you need a certain size of staff to keep the facilities running. Other salaries are variable depending on the demand for the services at the time. In contrast, supplies are predominantly fixed because the incremental cost of brochures, medicines, or information system services are minimal compared to the initial cost of having these items available in order to serve the customers.
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