Fixed cost is a cost that does not change when sales or production volumes increase or decrease. This is because they do not directly associate with manufacturing a product or delivering a service. As a result, fixed costs are indirect.
Fixed costs can include property taxes, rent, salaries and the cost of benefits for non-sales and management personnel. They are one of three types of incurred costs by most businesses.
Fixed costs can be used to calculate several key metrics, including a company’s breakeven analysis and operating leverage.
A breakeven analysis involves using both fixed and variable costs to identify a production level in which revenue equals costs. This can be an important part of cost structure analysis. A company’s breakeven production quantity calculates :
Breakeven Quantity = Fixed Costs ÷ (Sales Price per Unit – Variable Cost per Unit4
A company’s breakeven analysis can be important for decisions on fixed and variable costs. The breakeven analysis also influences the price at which a company chooses to sell its products.
Examples of Fixed Costs
Fixed costs can include recurring expenditures like your monthly rent, utility bills, and employee salaries. Here are a few examples of fixed costs to give you a better idea.
- Property rent: Your rent will be the same from month to month unless you decide to switch your offices.
- Utility bills: For the most part, electricity, website hosting, internet, and telephone bills will fluctuate very little throughout the year. However, some utility costs may depend on the level of production and can classify as a variable cost — we’ll touch more on that in the next section.
- Payroll: The money you pay your employees is stable unless you are giving raises or commissions or adding more employees to your team.
- Insurance: Insurance costs like healthcare for your employees or property insurance will be fairly constant.
Fixed costs = Total production costs — (Variable cost per unit * Number of units produced)