What distinguishes fixed costs from variable costs?

Fixed costs are characterized by their stability across different levels of production; they remain constant regardless of how much a company produces or sells. This includes costs such as rent, salaries of permanent staff, and depreciation, which do not change with the production volume in the short run.

Understanding fixed costs is essential in financial management as it helps businesses in budgeting, forecasting their expenses, and analyzing how production levels affect profitability. While variable costs change directly with production levels—such as raw materials or direct labor costs—the distinguishing feature of fixed costs is their invariance in the short term with regards to output. This concept allows businesses to plan effectively for both fixed and variable expenses, contributing to a clearer understanding of the overall cost structure and breaking even analysis.