Fixed Cost

What is a fixed cost?

A fixed cost is a business expense that stays the same no matter how many goods or services a company sells. Along with variable costs, it falls under the umbrella of operating expenses, or the money required to operate a business.

While variable costs fluctuate with production or sales volumes, fixed costs do not. Even if a business has no sales to report during a month, it will still be required to pay its fixed costs. 

To calculate fixed costs, add up every cost that stays the same every month. Then, you can calculate the average fixed cost per unit by dividing the number of goods/services produced or sold from the total fixed cost. A financial statement’s fixed costs are usually included in the SG&A section.

It’s important for business owners to understand their company's total fixed costs because they provide a closer look into operating profit and help determine the break-even point and operating leverage, which take into account fixed and variable costs per unit, the price per unit, and the number of units sold. 

FAQs 

What are the 6 fixed costs?

A company’s fixed costs differ depending on the industry or type of business, but here are six examples of common fixed expenses: 

• Monthly rent or mortgage payments
• Some utilities
• Advertising costs
• Certain salaries
• Depreciation
• Business insurance

What is the variable cost meaning?

Variable costs, unlike fixed costs, increase or decrease depending on the number of goods or services a business sells. For example, the higher the demand for your goods, the more you’ll need to produce, meaning that the total variable costs will increase.

Is labor a variable cost?

Labor may or may not be a variable cost; it depends on the type of labor. Salaries that are based on commission are considered variable because they increase or decrease along with the number of goods or services sold. Administrative salaries, on the other hand, typically would not be considered a variable expense because they stay the same no matter the production or sales volume. 

Are fixed costs indirect or direct?

Fixed costs are generally considered indirect costs because they aren’t directly related to production or sales volumes. They are recurring costs, meaning they stay the same no matter how many goods or services a company produces. For example, if a business owns its office building, the property taxes it owes are considered an indirect fixed cost.