Fixed and Variable Costs Comparison

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"The disparity might be attributed to the cost of labor, unions, overhead, and operating costs."
"That makes sense," you say.

"If we return the manufacturing operations to the United States," he says, "what types of short-term and long-term variable and fixed costs should we consider? What costs should we expect if we stay in South Korea? What financial risks are the company and the stakeholders exposed to?"

In order to help the new Production Manager, Mr. Sam Busch with his questions about the short and long term impacts of returning manufacturing operations to the United States, we first have to clearly define what the difference is between "fixed costs" and "variable costs" and then identify what the predominant costs are that will impact our manufacturing company.

First, the difference in fixed and variable costs is exactly as it sounds. "Fixed means the costs are "set in stone" for a specific time frame and are spread out and budgeted exactly for the duration of the period being analyzed. For example, if we bought a new manufacturing facility and it cost $1 million dollars, that cost would be a fixed cost and we would spread it out over time. Perhaps it would show up in the budget over the next 5 years at $16,667.00 a month without changing. So, it's very easy to account for this in a business budget. Some of the key examples of fixed costs are things such as; facilities, equipment, vehicles, tools, machinery, and so forth. Often these are called "one time purchases" and they can be depreciated via GAAP rules by the IRS to save on the tax burden associated with these purchases (Florentino, 2014).

Variable costs are a different animal to deal with all together and this is where many manufacturing companies in the United States have a hard time competing with overseas ...