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Fixed cost

society Maturity 13-18 Next article →

Businesses have many different types of costs to pay. One important type is called a fixed cost. These are expenses that do not change based on how much a business makes.

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People also call these indirect costs or overhead costs. They are often recurring, which means they happen over and over. For example, a business might pay rent or interest every single month. These costs stay the same even if the business sells nothing at all.

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To understand fixed costs, it helps to compare them to variable costs. Variable costs change based on how many goods a company produces. For a bakery, flour is a variable cost because more bread needs more flour. However, the monthly rent for the bakery is a fixed cost. The rent stays the same whether the baker makes one loaf or one hundred. Some costs are even called mixed costs. A telephone bill might be mixed because it has a fixed part and a part that changes with how many calls you make.

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History shows that these costs matter deeply for people starting new companies. High fixed costs can act as an entry barrier. This means it might be too hard or expensive for new entrepreneurs to join a market. In economics, fixed costs are often tied to capital. Capital includes things like buying land or large machines. Once you buy a machine, that cost does not change with production levels. These costs can be very high for a factory.

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There are different ways to group these costs. Some are called committed fixed costs. These involve things like buildings and equipment that are hard to change quickly. Other costs are called discretionary fixed costs. These are choices made by managers every year. Examples include spending on advertising, insurance, or research. In a survey of nearly 200 senior marketing managers, 60 percent said knowing these costs is very useful.

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This information helps them predict how much money they will earn.

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It is interesting to see how these costs change over time. In the short run, fixed costs are immutable, which means they cannot be changed. But in the long run, economists say there are only variable costs. This is because a long period gives a company time to change everything. Recently, fixed costs have grown for many companies. This happens because of automatic production and expensive equipment. Also, paying workers is often seen as a long-term cost. It is hard to change the number of people working in a very short time.

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