Fixed costs explained

Sweetness A fixed cost is any cost that will remain the same, regardless of changes in your sales volume.

For example, suppose you own a candy store.  Your fixed costs would include:

  • rent
  • utilities (electric and gas)
  • employee salaries
  • maintenance

because each of these costs would remain the same regardless of how much (or how little) candy you sell.

Fixed costs only remain the same over what we call a relevant range.  Within a certain range of sales, costs remain fixed.  However, if sales go too high or low, then your fixed costs will change.  For example, suppose your sales are so high that you need to hire another employee.  Then, once you have been pushed outside your relevant range, your fixed costs will increase.

Fixed costs do not change in the short-term.  However, they can be changed in the long-term.  You can sign a new lease, purchase energy-saving equipment, or hire more employees, thus changing your fixed costs over time.

[Image Sweetness by papalars, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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