Distinguish between Fixed cost, Variable cost Semi-variable cost.

Fixed costs are expenses whose total does not change in proportion to the activity of a business, within the relevant time period. For example, a retailer must pay rent and utility bills irrespective of sales.

Variable costs by contrast change in relation to the activity of a business such as sales or production volume. In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs.

Semi-variable Cost: A cost composed of a mixture of fixed and variable components: Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded. This type of cost is variable in the Sense that greater levels of production increase total cost. If no production occurs, then a fixed cost is still incurred. Labor costs in a factory are semi-variable. The fixed portion is the wage paid to workers for their regular hours. The variable portion is the overtime pay they receive when they exceed their regular hours.

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