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Fixed Cost

Fixed cost, also known as overhead or indirect cost, are expenses that remain constant and do not vary with changes in a business's production level or sales volume. These costs are incurred regardless of whether the company produces or sells anything. Fixed costs are part of the company's total operating expenses and must be paid regularly, regardless of its performance.

What You Need To Know

Examples of fixed costs include rent or lease payments for office space, employee salaries, insurance premiums, property taxes, and certain utility expenses like internet and phone bills. These costs do not change in the short term, even if the company experiences fluctuations in production or sales.

If a company produces more goods or services, the total variable costs (costs that vary with production) will increase, but the fixed costs will remain the same. Conversely, if production decreases, the total variable costs will decrease, but the fixed costs will still be incurred.

Understanding fixed costs is crucial for businesses as they play a significant role in determining a company's breakeven point—the level of sales at which total revenue equals total costs, and the company neither makes a profit nor incurs a loss. Additionally, businesses need to manage fixed costs effectively to maintain financial stability and plan their budgets and pricing strategies. In the long term, businesses can make strategic decisions to adjust or reduce fixed costs to improve their profitability and competitiveness.