Fixed Cost

Fixed costs are business expenses that do not change with variations in production or sales volume. These are incurred consistently over time, even if the company produces nothing. They are usually associated with time-bound obligations such as rent or insurance. Fixed costs help maintain the basic operational readiness of a business. Since they remain unchanged, they become less significant per unit as output increases. Effective planning of fixed costs is crucial for improving operating leverage and profitability.

Key Points:

• Helps assess the minimum cost burden a business must bear regularly.
• Affects long-term financial planning and budget decisions.
• Not influenced by production volume, hence needs allocation over units produced.
• Important for calculating the break-even point and cost control.
• As output increases, the fixed cost per unit decreases, improving profitability.

Examples:

• Office Rent: Paid monthly, even if no operations occur.
• Salaries of Permanent Staff: Admin or managerial salaries paid irrespective of output.
• Insurance Premiums: Fixed yearly amount for machinery or business risk coverage.
• Depreciation: Scheduled cost reduction of fixed assets like machinery.