Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on leased office machinery. "There are no fixed costs in the long run; all costs are variable." Explain.

Variable costs are costs that vary with production. If production rises, the variable cost rises.

Fixed cost are costs that do not vary with production.

The time frame and contracts allows for distinction between fixed and variable cost in the short run.

in the short run, some costs of production cannot be changed for various reasons. Some of the reasons include, supply contract and Labour laws. Due to labour contracts, it might be difficult if not impossible to change wages paid to workers or fire workers. This makes wages fixed in the short run.

Some costs can be varied easily, for example if sales are low, shipping cost would reduce because the amount of orders are smaller.

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Fixed costs include:

advertising expenditures

interest on company-issued bonds

payments for raw materials

Real estate tax

Executive salary

insurance premiums

wage payments

depreciation and obsolescence charges

rental payments on leased office machinery

Variable costs include:

fuel

shipping charges

sales taxes

All costs are variable in the long run because in the long run production decisions which appeared fixed can be changed. For example, Labour contract can end and the firm can decide to adjust or retain the contract in line with the current economic situation. The firm can decide to move to a cheaper location and reduce rental cost.