Fixed and Variable Costs

Costs can be classified into two categories, fixed and variable costs. Fixed costs are costs that do not change even if there is a change in production or the amount of goods sold. Some examples of fixed costs are rent, property tax, utilities, and insurance. It is important to note that fixed costs will remain unchanged for a short period of time. Rent, utilities, and insurance can increase on a yearly basis. Variable costs are ones that change with the amount of business a company has. If business changes the annual cost of raw materials will change. Some examples of variable costs are commissions, raw material, and packaging (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008).
In the following example:

Item: Raw Materials (cost for hamburgers)

Total Annual Cost: 650

Item: Building Rent

Total Annual Cost: 9000

Our cost of raw materials (per hamburger) is $.65. We take the 650 total annual cost divided by the 1000 units sold. (650/1000) = $.65. The cost of $.65 per unit will not change as we increase our need for more raw materials.
The raw material cost (for hamburgers), which currently is $650.00, is considered a variable cost. This is considered variable because as business increases or decreases the total annual raw material cost will change. The building rent which is currently $9,000.00 is considered a fixed cost. The annual rent expense will not change if business increases or decreases. However, the portion of the price that covers the fixed (rent) cost will increase or decrease as the number of hamburgers sold changes (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008).
If we are running a restaurant and there are 1000 units sold, we would take the fixed (rent) amount divided by the annual units sold and add the variable cost (hamburgers.) ($9000/1000 = $9.00 + $.65= $9.65 per unit). The annual cost for the raw material is $650.00. The annual cost of the rent remains $9000.00.
If we increase our sales volume to 6000 then we would take the rent amount divided by the annual units sold and add up our cost per hamburger. ($9000/6000 = $1.50 + $.65 = $2.15 per unit). The annual cost for the raw material increases to $3900.00. ($.65 * 6000). The annual cost of rent will remain $9000.00.
If we increase our sales volume to 8000 then we would take the rent amount divided by the annual units sold and add up our cost per hamburger. ($9000/8000 = $1.13 + $.65 = $1.78 per unit). The annual cost of raw material increases to $5200.00 ($.65 * 8000). The annual cost of rent will remain $9000.00.
When our sales volume increased from 1000 to 6000, and then to 8000, we are still in relevant range. When we are in relevant range it means that annual fixed costs remain the same. If production were to increase above the 8000 units, our relevant range may change (Horngren, Sundem, Stratton, and Burgstahler, Schatzberg, 2008).

References:

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., Schatzberg, J., Introduction to Management Accounting (14^th Edition) Pearson, Prentice Hall, Upper Saddle River, NJ.