Total Fixed Costs and Total Variable Costs
Total Fixed Costs: The total obligations of the firm per time period for all fixed inputs are called total fixed costs (TFC).These are those costs that do not change when the quantity of output changes. These include interest payment, rental expenditures, property taxes and those salaries (such as for top management) that are fixed by contract and must be paid over the life of the contract whether the firm produces or not.
Total variable costs (TVC): On the other hand, TVC are the total obligations of the firm per time period for all the variable inputs that the firm use. Variable inputs are those that the firm can change easily and on short notice. Payment for raw materials, depreciation associated with the use of the plant and equipment; most of the labour costs, excise duties are included invariable costs.
Total costs (TC) equal total fixed costs (TFC) plus total variable costs (TVC).
That is TC = TFC + TVC
Examination of the table gives us following observations regarding the total costs.
- TFC remain constant at all level of output it is unchanged even when the output is nil. Thus TFC is independent of output.
- TVC varies with the output. It is nil when there is no output. Variable costs are thus direct costs of the output
- TVC does not change in the same proportion. Initially it is increasing at a decreasing rate, but after a point it increases at an increasing rate. This is due of the law of variable proportion.
- TC varies in the same proportion as the TVC. In other words, the change in total cost is entirely, due to changes in the total variable costs. In fact the distance between TC and TVC is the TFC.
Powered By 360Presence
Project Time Cost Trade-off Project Time Cost Trade-off Project Time Cost Trade-off Project Time Cost Trade-off