Fixed costs are not dependent on the level of operating activity in a business e.g. salaries, depreciation, insurance and lease
Variable costs are those that change proportionately with the level of operating activity in a business e.g. materials and labour used
Businesses need to understand and monitor the level of both fixed and variable costs
Change in the volume of activity needs to be managed in terms of the associated changes in costs
Comparisons of costs with budgets, standards and previous periods ensure that costs are minimised and profits maximised
