What Is Fixed Cost? Definition and Guide

What is fixed cost?

What is Fixed Cost?

Fixed costs are expenses that stay the same no matter how much the business sells. These are regular costs the business must pay and they are not affected by how much the business produces.Common fixed business costs include:

  • Rent/lease payments or mortgage
  • Salaries
  • Insurance
  • Equipment lease payment
  • Car lease payment
  • Utility payments
  • Phone service
  • Business insurance

All business expenses can be divided into two types of costs: fixed and variable

A constant figure

Fixed costs are relatively constant—they don’t change, or vary, much.

Your electric bill, for example, might increase a little during warmer months due to increased air conditioning usage, but, month to month, there should be little change.

How to calculate total fixed costs

To determine an organization’s total fixed costs, simply add all of the fixed costs together. Total fixed costs are the sum of all individual fixed costs.

Impact on profitability

Some types of businesses have high fixed costs, such as a commercial printing operation, which may have large equipment costs and space requirements The cost to acquire the machinery and the space generates high monthly payments—no matter how many printing jobs the business has.

However, once those fixed costs are recouped and the company reaches its break-even point, the costs associated with production are generally quite low. From then on, it's fairly easy to generate profits since the variable costs—the expenses associated with product manufacturing—are lower.

At the other end of the cost spectrum, companies with low fixed costs, such as graphic designers or merchandising consultants, have higher variable costs. It doesn’t take much revenue for such service businesses to break-even, but the amount of profit generated after that point generally remains about the same.

Profits don’t skyrocket after all the fixed costs are covered, as they do with high-fixed-cost ventures.

In general, keeping fixed costs low is a smart financial strategy.

What Is Fixed Cost? FAQ

What is fixed cost with example?

Fixed cost is a business expense that does not change regardless of the activity level of the business. Examples of fixed costs include rent, salaries, insurance, property taxes, interest expenses, depreciation, and potentially some utilities.

What is fixed & variable cost?

Fixed costs are those costs that do not vary with changes in the level of output or business activity, such as rent and salaries. Variable costs are those costs that vary in direct proportion to changes in the level of output or business activity, such as materials, supplies, and wages.

What costs are variable?

Variable costs are those costs that fluctuate in relation to production volume, such as raw materials, direct labor, and commissions. Other examples of variable costs include shipping expenses, sales commissions, and certain overhead expenses that are directly related to the production process.