Examples of Fixed Costs
Fixed costs are expenses that do not change with the level of business activity, at least in the short term. Here are some examples of typical fixed costs in different types of businesses:
- Rent or Lease Payments: Most businesses have to pay for the space they operate in, whether it’s an office, a store, a warehouse, or a factory. These costs typically do not change from month to month, regardless of business activity levels.
- Salaries: While some employees may be paid on a per-hour or per-piece basis (which would be a variable cost), many receive a fixed salary that does not change with the level of output or sales.
- Insurance: Businesses usually need various types of insurance, including liability insurance, property insurance, and workers’ compensation insurance. These insurance premiums are typically fixed over the term of the policy.
- Depreciation and Amortization: These costs represent the spread of the cost of long-term assets over their useful life. While they’re not cash expenses, they are considered fixed costs because they do not change with the level of output or sales.
- Property Taxes: If a business owns property, it will likely have to pay property taxes. These taxes are typically fixed and are paid on a regular schedule.
- Utilities: While some portion of utility costs might be variable, businesses often have a base level of utilities (like electricity and water) that they need to pay regardless of their production levels.
- Interest Payments on Loans: If a company has taken out a loan, it will have to make regular interest payments. These payments are typically fixed over the term of the loan.
Remember, the main characteristic of a fixed cost is that it does not change with the level of business activity in the short term. So even if a business is not making any sales or producing any goods, it still incurs these costs. In contrast, variable costs, such as raw material costs or direct labor costs, change directly with the level of production or sales.