3.3.1—Types of cost

Fixed costs do not change with output in the relevant range; variable costs change as output changes; total cost is fixed cost plus variable cost. Direct costs can be traced to a product, while indirect costs are shared overheads.

Rent and core administration may remain when output is zero, whereas raw materials and packaging usually rise with units. Variable cost is not guaranteed to rise proportionally: purchasing economies or capacity limits can change the slope.

If fixed cost is $4,000 and variable cost for 500 units is$2,500, total cost is $6,500. A manager can then ask whether an extra unit adds only its direct variable cost or also triggers a new shift, machine or delivery overhead.

Fixed means constant over a chosen activity range, not forever; variable does not mean every cost rises smoothly. Classify the cost in context and state the output range before drawing a conclusion.