A fixed cost refers to the business expenses that remain fixed and do not change even though a company experiences changes in revenue or other levels of operation.

Fixed costs include any expense that a company regularly pays, which stays the same regardless of its output levels.

A business, irrespective of any particular business operations, must pay fixed expenses.

In other words, no matter how well the fiscal period has gone, it is the amount that the company has to pay to remain operating. Generally, fixed costs do not alter over time and are used to assess companies break-even point, particularly those starting.

Examples of fixed costs

For most firms, there are various noticeable fixed costs. For example, if the company rents an office or workspace, the monthly rent will be considered a fixed cost.

Further examples of fixed costs are:

  1. Insurance: The periodic charge or regular amount under an insurance contract.
  2. Depreciation: This is regular expense or payment over the useful life of an asset
  3. Salaries: It is a fixed amount of compensation paid to employees, regardless of their hours employed.
  4. Utilities: This includes the expense of electricity, phones, petrol, etc.
  5. Property tax: This is a tax paid by the business to local authority and amount is based on the property’s cost.
  6. Marketing and advertising cost: It includes the cost associated with social media campaigns and hosting websites.

How to calculate fixed costs?

Fixed costs calculation is done by following the below mentioned three steps:

Step 1: Begin by listing all costs

An individual can start by listing every monthly cost that your business has. Take a back at bank account transfers, budgets, and receipts. Identify all types of expenses that do not change from month to months, such as salaries, rents, depreciation charges, premiums for insurance, etc.

And all the annual expenses should be divided by 12 (i.e. 12 months). List all expenditures and the cost per month of that expenditure.

Step 2: Separate expenditures

Next step is to divide the list of expenditures into two parts:

Fixed costs (those that are not impacted or dependent on production or revenues )

Variable costs (those that are directly impacted by production or revenues)

Step 3: Add costs

Bring together all the different monthly numbers in the fixed costs list. That figure reflects the monthly total fixed cost of a business.