Fixed Cost – Meaning, 9 Examples, and Ultimate Guide On How To Calculate Fixed Costs

Date:

Fixed Cost – Meaning, 9 Examples, and Ultimate Guide On How To Calculate Fixed Costs

“To ensure the advancement of a business or company, it is essential to be familiar with your fixed costs and take proactive measures to minimize their impact on your operations. Fixed costs are mandatory and remain constant, resembling a contractual commitment.

This blog post will explore detailed explanations and provide illustrative examples to enhance understanding. I encourage you to read further to understand this information comprehensively.”

What is a fixed cost?

A fixed cost refers to an expenditure that remains constant regardless of fluctuations in the production or sale of goods and services. Irrespective of specific business activities, a company must pay these expenses.

The term “fixed costs” differentiates them from variable costs, which vary by the number of products sold. Fixed costs are typically determined through contractual agreements or predetermined schedules. Once established, these costs remain unchanged throughout the agreement or schedule.

Certain businesses face high fixed costs, such as manufacturers encountering substantial expenses due to the necessity of equipment and physical space for their operations, regardless of whether they have made any sales yet.

Fixed cost examples

Your company may encounter numerous fixed costs. Here are some illustrative examples of fixed expenses that require consideration:

1. Rent or mortgage payments

A mortgage payment is a payment made by either a business or an individual to fulfil the repayment obligations of a loan obtained for purchasing a property. It is worth noting that these payments remain unchanged as they are predetermined through a signed agreement.

The performance of the business or individual does not influence the mortgage payment amount. Conversely, rental expenses may increase over time, typically based on the terms outlined in the signed agreement.

2. Depreciation

The process of gradually expensing the value of physical assets, such as production equipment, over their expected lifespan.

3. Amortization

It refers to systematically allocating expenses associated with intangible assets (such as patents acquired through purchase) throughout their estimated usefulness.”

4. Utility bills

To paraphrase the statement: “It represents the expenditure for essential services such as electricity, phone, gas, trash collection, sewer services, and more. Although certain utilities, like electricity, may rise with increased production, utility bills are commonly regarded as fixed costs because the company must pay a minimum amount irrespective of its output.”

5. Salary payments to employees

It refers to predetermined payment sums provided to employees, regardless of their work hours.

6. Health insurance

It pertains to regular payments made to an insurance company as part of an agreement or contract.

7. Advertising and marketing costs

This includes expenses related to social media campaigns and the cost of hosting a website. For example, when you acquire a domain for your website, there is a consistent monthly fee regardless of your business’s performance on that website.

8. Property tax 

It is a tax the local government imposes on a business, calculated according to the value of its assets.

9. Interest expense

refers to the expenses associated with taking out a loan, which can be considered a fixed cost only when a predetermined interest rate is included in the loan contract.”

Fixed costs vs. Variable costs

Variable costs are additional expenses typically associated with producing goods or services. They can be one-time or recurring costs that vary based on the quantity of products or services generated.

Variable costs are directly influenced by production. For instance, wages are considered variable costs, whereas salaries are not. Wages often depend on the number of hours your staff work, while salaries remain consistent. Another example of variable costs includes the materials needed to create your product.

To make it more clear to you, the table below shows the difference between fixed costs and variable costs.

Recommended: Variable Cost – Definition, Formula, and 9 Examples

Fixed Costs Variable Costs
These are expenses that remain constant regardless of the level of production.These are expenses that fluctuate or alter based on the level of production.
It is duration-dependent, as these costs remain consistent over a certain period.It is quantity-dependent, as these costs fluctuate based on changes in production volume.
The overall fixed cost remains unchanged.These increases or decreases
examples are rent, depreciation, etc.examples are direct material or direct labour

How to calculate fixed costs

The three steps provided are the ways to calculate your fixed costs

Step 1

List all costs

First, make a comprehensive list of all your business’s monthly expenses. A helpful suggestion is to review past budgets, receipts, and bank transactions. Annual costs should be divided by 12 to allocate them monthly. Document all expenses and their corresponding monthly costs, preferably using a spreadsheet.

Step 2

Separate costs

Currently, your focus is solely on fixed costs. Consider splitting the list of expenses into two categories:

  1. Fixed costs (the ones that don’t change)

2. Variable costs (those that vary)

Step 3

Add costs

Sum up all the individual monthly amounts from the list of fixed costs. This total amount represents your monthly fixed cost.

Jael Okwuchukwu
Jael Okwuchukwu
I am Okwuchukwu Jael, a writer, educator, and musician from Enugu State. Teaching, both academic and musical, is a passion of mine, and I specialize as a Western pianist. Currently, I am employed as a blogger at Writer's King LTD, combining my love for writing and desire to share knowledge with a broader audience.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Share post:

Subscribe

Popular

More like this
Related

Apply Now: Shell Graduate Programme 2024 is Ongoing – Nigeria

Apply Now: Shell Graduate Programme 2024 is Ongoing -...

Apply Now at TotalEnergies Marketing Nigeria Plc for Young Graduate Programme 2024

Apply Now at TotalEnergies Marketing Nigeria Plc for the...

United Bank for Africa Plc (UBA) Graduate Management Accelerated Programme (GMAP) 2024

United Bank for Africa Plc (UBA) Graduate Management Accelerated...

TAGDev Scholarship Award 2024/2025: See the Eligibility requirements and Available programmes

TAGDev Scholarship Award 2024/2025: See the Eligibility Requirements and...