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Fixed Cost

Ankit0

Definition:

Fixed costs are expenses that do not vary with changes in the volume of production or sales. They are costs that remain constant regardless of the company’s activity level.

Examples:

  • Rent
  • Depreciation
  • Interest expense
  • Salaries of fixed staff
  • Depreciation of equipment

Characteristics:

  • Invariable: Do not change with variations in production or sales volume.
  • Irrecoverable: Cannot be recovered through sales revenue.
  • Examples: Lease payments, rent, depreciation, and some interest expenses.
  • Category: Indirect costs.
  • Accounting treatment: Expensed in the period they are incurred.

Formula:

Fixed costs = Total fixed costs

Example:

A company has fixed costs of $10,000. If it produces 10,000 units, the fixed cost per unit will be $10,000/10,000 = $1.00.

Benefits:

  • Provides a constant base for budgeting and cost control.
  • Helps to stabilize earnings per share.
  • Can be used to calculate break-even point.

Drawbacks:

  • Can limit flexibility if production or sales volume changes significantly.
  • Can make it difficult to forecast future costs accurately.
  • Can be volatile if there are changes in prices or exchange rates.

FAQs

  1. What is a fixed cost?

    A fixed cost is a business expense that does not change with the level of production or sales. It remains constant over time, regardless of how much is produced or sold.

  2. What is fixed cost and example?

    Fixed costs are costs that remain the same, such as rent or salaries. For example, a company pays $10,000 per month for office rent, which stays the same whether they produce 1 or 1,000 units.

  3. What are fixed and variable costs?

    Fixed costs remain constant regardless of production, while variable costs change based on the level of output. Rent is a fixed cost, and raw materials are a variable cost.

  4. What describes a fixed cost?

    A fixed cost is a consistent expense that doesn’t fluctuate with production levels, like rent, insurance, or loan payments.

  5. What are examples of fixed costs?

    Examples of fixed costs include rent, insurance, salaries, and loan payments. These remain unchanged regardless of the amount produced or sold.

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