What is the difference between fixed costs and variable costs?

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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.