What is a Fixed Cost?

by Investing School on May 10, 2010

A fixed cost is an expense for a business that is not dependent on the activities of the business. Fixed costs do not change for the most part regardless of the output level or sales revenue of the business. Fixed costs are usually salaries, rent for the office space, or other expenses that do not change. For example, a business shop owner would always have to pay rent regardless of how the business is going. When you look at costs over time, most costs tend to vary and no costs are ever truly “fixed” permanently but this concept is used to distinguish between fixed and variable costs.

You can contrast fixed costs to variable costs which are paid per quantity. When you look at total costs for a business, fixed costs make up one of the two components. The other is variable costs.

Fixed costs should not be confused with sunk costs. As mentioned earlier, fixed costs are never truly “fixed” forever. There is an expectation that costs will change. No business owner would expect to pay the same amount in rent for the duration of the business. Fixed costs are relative to the quantity of production for a certain period of time. For example, a business has had many unplanned and unpredicted expenses but these expenses are not at all related to production. But then you may have production output that may be very high or very low and this would also have no bearing on the fixed costs of the business.

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