What distinguishes fixed expenses from variable expenses?

Fixed expenses and variable expenses are two fundamental concepts in budgeting and financial planning that differ based on their behavior in relation to business activity levels.

Salaried labor is categorized as fixed expense because it typically remains constant regardless of the level of output or sales. Salaries paid to employees do not fluctuate with the volume of work or production; they are incurred consistently, which provides stability in financial forecasting. In contrast, hourly labor is considered a variable expense since it can change based on the number of hours worked, which may increase or decrease in relation to business needs or production requirements.

Understanding this distinction is vital for businesses, as it helps in cash flow management, pricing strategies, and expense control. Accurate categorization of expenses allows businesses to make informed decisions about budgeting, resource allocation, and financial planning.