What are Fixed Costs?
Fixed Costs are independent of output and its dollar amount remains constant irrespective of a company’s production volume.
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How to Calculate Fixed Costs
Fixed costs are output-independent, and the dollar amount incurred remains around a certain level regardless of changes in production volume.
Fixed costs are not linked to production output, so these costs neither increase nor decrease at different production volumes.
A company’s costs classified as “fixed” are incurred periodically, so there is a set schedule and dollar amount attributable to each cost.
Whether the demand for a particular company’s products/services (and production volume) is above or below management expectations, these types of costs remain the same.
For instance, a company’s monthly office rent would be an example, since no matter whether a company’s sales in a particular period are positive or sub-par — the monthly rental fee charged is pre-determined and based on a signed contractual obligation between the relevant parties.
Fixed Cost vs. Variable Cost: What is the Difference?
A fixed cost, contrary to a variable cost, must be met irrespective of the sales performance and production output, making them much more predictable and easier to budget for in advance.
Unlike variable costs, which are subject to fluctuations depending on production output, there is no or minimal correlation between output and total fixed costs.
- Fixed Cost → The cost remains the same regardless of the production output
- Variable Cost → The cost is directly tied to production volume and fluctuates based on the output
But in the case of variable costs, these costs increase (or decrease) based on the volume of output in the given period, causing them to be less predictable.
Fixed Cost Formula
A company’s total costs are equal to the sum of its fixed costs (FC) and variable costs (VC), so the amount can be calculated by subtracting total variable costs from total costs.
