Difference between Fixed Overheads and Variable Overheads.
Fixed overheads or costs are those costs of the firm that do not change with the change in the output. On the contrary, variable overheads or costs are those costs that vary with changes in the output.
The expenditures on depreciation, rent of land and buildings, property taxes, and interest payments on bonds are some of the examples of the fixed costs.
Where as the examples of variable costs would include wages and expenses on raw materials.
As mentioned above, fixed costs remain the same irrespective of actual output, likewise the depreciation on machinery is treated as fixed.
However, it may be treated as fixed and variable both, in the sense that how much of depreciation cost is due to technical obsolescence of assets is treated as fixed cost and the part of cost which is due to the use of the equipment’s is treated as variable costs.
Thereby, such costs are known as semi-variable costs. It can be said that it is very difficult to classify all costs into fixed and variable.
However, some costs, such as the amount of wages or cost of raw materials tend to vary from time to time, and from output to output thus they are referred to as variable costs.
On the other hand the cost incurred in the form of rent of land and building does not change with respect to changes in the output as it needs to be paid in full which cannot be varied with highs or lows in the output.
It is the economists who refer the fixed costs as fixed overhead and variable costs as variable overheads. On the other hand for an accountant, the fixed costs are referred to as indirect costs and variable costs as direct costs.
The main meaning remains the same. As it is this basic distinction between the fixed and variable costs that is of great value in the break-even analysis and the pricing decisions.
As when the output goes up, the fixed cost per unit of output comes down, as the total cost is divided between larger units of output, which further has an effect on the managements pricing decisions.