Fixed cost

Fixed costs or indirect costs are expenses that do not change in direct proportion to the activity of a business.

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For example, a retailer must pay rent and utility bills irrespective of sales volumes. Fixed costs include, but are not limited to, overheads (rent, electricity, insurance, and such), payroll (particularly salaries), and promotion.

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In retail the variable costs are usually the cost of goods.

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A fixed cost is not always static, therefore in the long term one must introduce the concept of a 'stepped' fixed cost curve. A fixed cost is only valid within a relevant range. For example, a fixed cost is going to differ for a company based on whether it produces 500 units or 500,000,000 units, causing increased fixed costs: higher electricity, more insurance, etc. Using a fixed cost outside a relevant range leads to extrapolation.

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Along with variable costs, fixed costs make up one of the two components of total cost.

Related Topics:
Variable costs - Total cost

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