Accounting Tutorials

- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Income Statement Basics
- Income Statement Examples
- Income Statement Formats
- Income Statement Template
- Income Statement Formula
- Multi Step Income Statement
- Profit and Loss Statement Template
- Profit And Loss Statement Format
- Book Profit
- Contribution Margin Income Statement
- Sales Revenue
- Net Sales Formula
- Variable Costing Income Statement
- Pro Forma Income Statement
- Purpose of Income Statement
- Income from Operations Formula
- Cost of Goods Sold
- Cost of Goods Manufactured (COGM)
- COGS Formula
- Cost of Goods Sold Examples
- Cost of Sales Formula
- SG&A Expenses (Selling, General & Administrative)
- Interest Expense Formula
- List of Operating Expenses
- Non Operating Income
- Pretax Income (Earnings Before Taxes)
- Income Tax Expense
- Income Tax Accounting
- Earned Income
- Average Total Cost Formula
- Gross Profit
- Gross Profit Formula
- Direct Costs
- Indirect Costs
- Prime Cost
- Duty vs Tariff
- EBITDA
- EBITDA Calculation
- Adjusted EBITDA
- EBIT (Earnings Before Interest and Tax)
- EBIT Calculation
- Net Operating Income
- Operating Income
- Turnover vs Profit
- Operating Profit vs Net Profit
- Net Income Formula
- EBITDA Formula
- Operating Expense (OPEX)
- Operating Expense Examples
- Interest Expense
- LTM EBITDA
- NOPAT
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- Depreciation Expense Formula
- Depreciation Rate
- Straight Line Depreciation Method Formula
- Accumulated Depreciation Formula
- MACRS Depreciation
- Depreciation Tax Shield
- Accelerated Depreciation
- Written Down Value Method
- Depletion Expense
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Warranty Expense
- Other Expenses
- Accrued Income
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Lease Payment
- Financing Costs
- Effective Tax Rate Formula
- Progressive Tax
- Taxable Income Formula
- Completed Contract Method
- Tax Shield Formula
- Double Taxation
- Marginal Tax Rate
- Tax Haven
- Net Loss
- Pro-Forma Earnings
- Margin vs Profit
- Net Operating Loss (NOL)
- Tax Loss Carry Forward
- Tax Loss Harvesting
- Tax Shield
- Sundry Expenses
- Trade Discount
- Trade Discount vs Cash Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Above the Line vs Below the Line
- Operating Income vs Net Income
- Cost vs Expense
- Expense vs Expenditure
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Tax Evasion vs Tax Avoidance
- Sales Tax
- Excise Tax
- Indirect Tax
- Direct Tax vs Indirect Tax
- Tax Lien
- Value Added Tax (VAT)
- Ad Valorem Tax
- Estimated Tax
- Proportional Tax
- Tax-Exempt
- Marginal Tax Rate Formula
- Regressive Tax
- Regressive Tax Examples
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Revenue vs Turnover
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Variance Analysis
- Other Comprehensive Income
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed Cost
- Fixed cost vs Variable cost
- Price vs Cost
- Hard Cost vs Soft Cost
- Overhead Costs
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Marginal Cost Formula
- Margin vs Markup
- Markup Formula
- Contribution Margin vs Gross Margin

- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Shareholders Equity (91+)
- Cash Flow Statement (17+)
- Accounting Careers (26+)
- Accounting Books (8+)
- Budgeting in Finance (31+)

Related Courses

## What is a Fixed Cost?

The term “Fixed Cost” refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. In other words, it is the type of cost that is not dependent on the business activity, rather it is associated with a period of time. It can be seen as expenses that are incurred by a company irrespective of the level of business activity, which may include the number of units produced or sales volume achieved. Fixed cost is one of the two major components of the total cost of production, the other component is the variable cost. Examples of fixed costs are monthly rental paid for accommodation, salary paid to an employee, etc. However, please note that fixed cost is not permanently fixed, but it changes over the period of time.

### Examples of Fixed Costs

The following are examples of fixed costs:

- Leasing the office space is a fixed cost. As long the business is operating in the same space the lease or rent cost remains same.
- Utility bills like heating or cooling as per the season changes is another cost which is not affected by the change in business operations.
- When a company registers itself on a website domain then a monthly charge is to be paid that remains fixed irrespective of the activities performed on the website.
- When a company integrates its e-commerce platforms with the website in order to continue communications and transactions with its customers then the charges which are charged for this integration of this cost which has to be paid every month.
- When a business will start its operations then it leases or rents warehouse space whose charge is paid every month. This charge does not change even if the business decides to store more or fewer products inside the warehouse keeping in mind the storage and capacity limits. This warehouse rent is a fixed cost.
- The equipment purchased to produce the products belong to the business once purchased and it depreciates over time. Depreciation costs are considered as these costs when the company is aware of what time every year the equipment needs to be replaced.
- Companies hire trucks as per of their logistics and leases on trucks are fixed which do not change depending on the number of shipments the company undertakes.
- If a business does its financing with the help of bank loans then loan payments remain the same irrespective of the business’s performance. The loan repayment amount is fixed as long as there is a balance to be paid on that loan.
- Health insurance for a business is fixed as the recurring costs to the insurer are fixed.

### Fixed Cost Formula

The formula for fixed cost can be derived by deducting the product of variable cost per unit of production and the number of units produced from the total cost of production.

**Fixed Cost Formula = Total Cost of Production – Variable Cost per Unit * No. of Units Produced**

### Step by Step Calculation of Fixed Cost

Let’s see some Fixed Cost Calculation Examples

#### Example #1

**Let us take the example of company ABC Ltd which is a toy manufacturing unit. According to the production manager, the number of toys manufactured in the month of April 2019 is 10,000 and the total cost of production for that month as per the accounts department stood at $50,000. Calculate the fixed cost of production if the variable cost per unit for ABC Ltd is $3.50.**

**Solution:**

Given,

- Variable cost per unit = $3.50
- Total cost of production = $50,000
- Number of units produced = 10,000

Therefore, the fixed cost of production of ABC Ltd for the month of April 2019 can be calculated as,

4.9 (1,067 ratings)

Fixed Cost formula = $50,000 – $3.50 * 10,000

**FC = $15,000**

Therefore, the fixed cost of production of ABC Ltd for the month of April 2019 is $15,000.

#### Example #2

**Let us take another example of company XYZ Ltd which is a shoe manufacturing unit. According to the production manager, the production information is available for the month of March 2019 is as follows:**

**Raw material cost per unit is $25****Total number of shoe manufacturer is 1,000****Labour charge is $35 per hour****Time taken to produce a shoe is 30 minutes****The total cost of production is $60,000**

**Calculate the Fixed Cost of production for XYZ Ltd in the month of March 2019.**

**Solution:**

Given,

- Total cost of production = $60,000
- Raw material cost per unit = $25
- Labor cost per hour = $35 per hour
- Time taken to produce a unit = 30 min = 30 / 60 hours = 0.50 hours
- Number of units produced = 1,000

So, the calculation of variable cost per unit will be –

**Variable Cost per Unit = Raw Material Cost per Unit + Labour Cost per Hour * Time is Taken to Produce a Unit (in hours)**

Variable Cost per Unit = $25 + $35 * 0.50

**Variable Cost per Unit = $42.50**

Therefore, the FC of production of XYZ Ltd for the month of March 2019 can be calculated as,

Fixed Cost Formula = $60,000 – $42.50 * 1,000

**FC = $17,500**

Therefore, the FC of production of XYZ Ltd for the month of March 2019 is $17,500.

**Please refer given excel template above for detail calculation**

### Advantages

- Fixed costs continue to remain at the same level throughout a company’s production process unless any major capital expenditure is undertaken. For instance, if a company purchases and installs a machine, post that the company will charge depreciation expense every year irrespective of the level of production.
- It is relatively easier to account for a fixed cost because it does not change in line with the volume of goods produced or sold.
- Although total fixed cost does not change with an increase in production volume, per-unit fixed cost decreases which is an encouragement for the production team to produce more.
- Production output and fixed costs typically remain the same for a relevant range of output.
- It reduces the net income a company for the accounting period that results in reduced tax liability, which eventually cascades to cash savings.
- Fixed cost intensive industries act as a barrier to new entrants or eliminate smaller competitors; it discourages new competitors from making an entry into the market.

### Disadvantages

- One of the major disadvantages is the surge in per-unit fixed cost if a company fails to operate at a certain minimum production rate. In fact, if a company has a large number of such costs, then fall in production or sales volume can really squeeze the profit margins.
- It is very tough to find any direct relationship between the product and the fixed cost if the company is into multiple products. As such, at times the allocation or apportion of cost is done on the basis of profitability of each division which can result in wrong financial productivity measurement.

### Conclusion

As can be seen from the above explanations that it is very stable in nature and does not change over a period of time. However, a higher volume of production or sales can result in better absorption of fixed cost which then results in improved profitability. As such, it is important to understand the concept of fixed assets as it can be crucial in the achievement of profitability targets.

### Recommended Articles

This has been a guide to what is a Fixed Cost and its definition. Here we discuss how to calculate fixed cost along with its formula and practical examples, advantages, and disadvantages. You can learn more about accounting from following articles –