What is fixed cost?
A fixed cost is a cost that does not vary depending on the number of goods or services produced or sold. Fixed costs are expenses that must be paid whether the company generates any items or provides services. This means, in general, that fixed costs are indirect because they don’t apply to a company’s production of anything.
Fixed costs are generally determined by contract agreements or schedules. These are the overall expenses of running a business. Fixed expenditures do not fluctuate over the length of an agreement or cost schedule once they have been established.
Fixed costs example
A fixed cost is one that does not vary based on the company’s earnings. For example, a building’s rent is a fixed cost that a small business owner negotiates with the landlord depending on the amount of space required for operations. The monthly rent will be $4,000 for the next ten years if the owner leases 1,000 square feet.
Fixed expenses are not constant in the long term. Consider the previous example. The monthly rent will remain fixed until the company occupies the premises or till the landlord raises the rent after the expiration of a lease agreement. If the owner decides to relocate to a larger space or pay more, the company’s expenditure would most certainly rise.