Western Governors University (WGU) ACCT3314 D101 Cost and Managerial Accounting Practice Exam

The example of a fixed cost is rent for office space. Fixed costs are expenses that do not change with the level of production or sales within a specific timeframe. Rent is considered a fixed cost because it remains constant regardless of how much or how little a company produces. This means that whether the business is thriving or facing low demand, the obligation to pay rent continues, making it a predictable and stable expense.

In contrast, raw materials cost is variable as it fluctuates with production levels. As production increases, the amount spent on raw materials also increases. Sales commissions vary based on sales performance; therefore, they are also considered variable costs. Utility costs, while they can have a fixed component, often depend on actual usage and can vary month to month, categorizing them as variable costs as well. This illustrates the distinct nature of fixed costs, which provide stability in financial planning and budgeting.