Date of this Version
Cornhusker Economics, January 5, 2000, agecon.unl.edu/cornhuskereconomics
The distinction between fixed vs. variable assets has long been a troublesome concept in understanding economic and financial behavior. The traditional distinction between fixed vs. variable costs is that fixed costs are unaffected by use, while variable costs are directly related to use. While this concept is useful, problems occur in classifying assets according to fixity as well as implementing it. It has become increasingly recognized that "fixed cost" components such as depreciation and interest on investment are actually impacted by use. This is one reason that for assets such as farm machinery, the terminology of "ownership-operating" costs is replacing "fixedvariable" costs. Adding to the complexity is the increasing understanding and use of another cost concept termed "setup" costs which does not fall into a fixed-variable classification.