Write notes on the following:
Fixed (Supplementary) costs
Variable (Prime) costs. 

At a given point of time a firm faces two types of cost : fixed cost and variable cost as explained below.

(a) Fixed costs. Fixed costs are the costs which do not change with change in the level of output. These are primarily incurred on fixed factors like machines, building, etc. Fixed costs do not change when level of output is increased or decreased. Fixed costs remain (because fixed factors remain) even if output is zero. In fact fixed costs are incurred even before output actually starts. These have to be borne even if no output is produced. For instance, a sugar mill usually remains closed for about 3 months during a year for want of raw material (sugarcane) but still the mill owner has to incur certain costs like rent of factory building, interest on past borrowings, salaries of permanent employees, municipal taxes, insurance premium etc. These costs are called fixed costs or supplementary costs or overhead costs. Fixed cost and variable cost are formally called total fixed cost (TFC) and total variable costs (TVC). These are shown in the following table and depicted in Fig. 3.4. The point to be noted that Total Fixed Cost (TFC) is constant, i.e., र 150 whether output is zero or 4 units. Since TFC remains the same (fixed) at all levels of output, TFC curve is equidistant from horizontal axis (i.e., X-axis). As a result TFC curve is a straight line parallel to X-axis as shown in fig.

(b) Variable costs. These are the costs which vary directly with the change in the level of output. These are costs which are incurred on variable inputs. Such costs increase when output increases and decrease when output falls. That is why they are called direct costs since they vary (change) directly with the change in the level of output. In other words, variable costs are incurred so long as production continues but the moment production stops, variable costs also cease. The costs incurred on raw material, power, fuel, wages of temporary labour, wear and tear of machines etc. are examples of variable costs. Continuing the above example, when sugar mill is working, the mill owner has to incur costs, on sugarcane, power, wages of temporary labour etc. If production of sugar has to be increased, these costs will also increase and if production has to be decreased, these costs will also decrease. And if sugar mill closes, variable costs will also fall to zero. These have been shown in the following table and depicted in Fig. 3.5. Total cost incurred on variable factors is called Total Variable Cost (TVC). It is clear from the table that TVC is zero at zero output but increases as output increases. TVC curve in Fig. 3.5 also represents the same. The curve is upward sloping which indicates that total variable costs go on increasing with increase in output. Variable costs are called prime costs or direct costs because these are costs of direct labour and direct material incorporated into product.

Fig. 3.5

Importance. The significance of distinction in costs lies in the fact that when a firm is incurring losses, it still continues its production if the market price covers at least its variable costs during short period. In other words, the firm will be ready to incur losses equal to fixed costs rather than stop production in the short period. However, in the long period, market price must cover firm's fixed and variable costs otherwise firm will stop production.