## Variable Costs vs. Fixed Costs: Differentiation Helps Business Grow Better

Each business faces two types of expenses with different characteristics. Some often confuse which costs should be cut and which must be accepted. Misunderstanding this often leads to poor investment or expansion decisions. Today, let's understand how **variable costs** and **fixed costs** differ and how to use them in business planning.

## Fixed Costs – Unavoidable Expenses

Fixed costs are expenses that a company must pay regardless of whether the business makes no sales or sells at full capacity. Like paying rent for an office building, whether that month’s revenue is high or low, the full amount must be paid.

A key characteristic of fixed costs is **stability**. Because they are stable, businesses can plan budgets more easily and forecast profitability to some extent.

### Common examples of fixed costs:

- Rent – regardless of production volume, rent must be paid monthly
- Salaries of permanent staff – a monthly expense regardless of units produced
- Business insurance – paid annually or per contract to mitigate risks
- Depreciation of equipment – costs calculated based on investments in machinery or infrastructure
- Loan interest – if the company borrows money, interest must be paid regularly regardless of circumstances

## Variable Costs – Expenses that Increase with Production

Unlike fixed costs, **variable costs** fluctuate with production and sales. The more you produce, the higher the expenses; the less you produce, the lower the costs.

The characteristic of variable costs is **flexibility** – companies can reduce expenses by lowering production levels, allowing for adjustable cost management.

### Examples of variable costs in operations:

- Raw materials and components – the more units ordered, the more raw materials needed
- Direct labor wages – workers paid based on production volume; more products mean more wages
- Packaging – more products to pack require more packaging materials
- Transportation and shipping – higher product volume increases shipping costs
- Energy and utilities – electricity and water usage increase with higher production
- Sales commissions – some businesses pay commissions based on sales; higher sales mean higher commissions

## Practical Differences – Why Differentiation Matters

Differentiating between variable and fixed costs is not just theoretical; it impacts real decision-making.

**Pricing** – businesses need to know the variable cost per unit to set appropriate selling prices. The price must be high enough to cover both costs and generate profit.

**Production planning** – understanding both costs helps managers decide how many units to produce to break even and how much to sell to make a profit.

**Investment** – if fixed costs are high (such as investing in expensive equipment), but variable costs are low, this may mean that after investment, the business can quickly become profitable.

**Risk management** – high fixed costs pose a risk of bankruptcy if customers disappear or the market downturns, since those expenses still need to be paid.

## Total Cost Analysis – A Key Tool for Managers

When combining variable costs with fixed costs, we get the total cost of business operations. The simple formula is:

**Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units Produced)**

This analysis helps businesses see clearly how profit varies at different production levels. For example, a clothing company with fixed costs of 100,000 THB per month and a variable cost of 50 THB per shirt, selling at 150 THB per shirt, needs to sell 1,500 shirts per month to break even. Beyond that, each additional sale increases profit.

## Improving Efficiency – Reducing Costs, Increasing Profit

To stay competitive in a tight market, smart cost control is essential.

**Fixed costs** – difficult to reduce practically but can be negotiated, such as renegotiating rent or refinancing loans to lower interest rates.

**Variable costs** – where businesses can maneuver by negotiating raw material prices, improving production efficiency, choosing cost-effective transportation methods, or increasing profit margins.

Additionally, some businesses choose models with high variable costs but low fixed costs (such as distributors), or models with high fixed costs but low variable costs (like automated factories), depending on market conditions and capital capacity.

## Summary – Making Smart Choices

Fixed costs and variable costs are two sides of the same coin. Good managers must understand the differences to use this information for decision-making, whether setting prices, making large investments, or improving efficiency to enhance competitiveness. Businesses that manage costs wisely can generate sustainable profits and grow over the long term.