Part of our Cost Classifications guide
Fixed Cost Examples
Fixed cost refers to those costs incurred by the company during the accounting period under consideration that has to be paid no matter whether there is any production activity or the sale activity in the business or not and the, examples of which include rent payable, salaries payable, interest expenses and other utilities payable.
The following example provides an outline of the most common fixed costs. Each example states the topic, the important reasons, and additional comments as needed. Here is the list of the top 11 most common Fixed Costs –
- #1 – Depreciation
- #2 – Amortization
- #3 – Insurance
- #4 – Rent Paid
- #5 – Interest Expense
- #6 – Property Taxes
- #7 – Salaries
- #8 – Utility Expenses
- #9 – Advertising and Promotional Expense
- #10 – Equipment Rental
- #11 – Legal Expenses
Let us discuss each one of them in detail –
Top 11 Most Common Examples of Fixed Cost
#1 – Depreciation
The gradual writing-off of a tangible asset over its life is called depreciation. It is a fixed cost as it is incurred with the same value over the asset’s life. It does not vary.
#2 – Amortization
Amortization is used to lower the cost value of intangible assets. It also includes the repayment of a loan. For example, suppose ABC Corporation spends $50,000 to acquire a patent that will expire in 5 years. It should be amortized over the five years before it expires. An amortization expense of $10,000 will be incurred as a fixed book cost.
#3 – Insurance
It is a periodic premium paid under the agreement of policy. For example, insuring the factory building is a fixed cost irrespective of the number of units produced within the factory.
#4 – Rent Paid
The rent paid for the space used to conduct the business is a fixed cost. This amount is not dependent on the performance of the company. Even for a retail shop, rent is fixed and is not dependent on the number of sales.
#5 – Interest Expense
Interest Expense against any borrowings like bonds, loans, convertible debt, or lines of credit from banks and financial institutions is fixed costs, also known as debt expenses.
#6 – Property Taxes
The government imposes a property tax on businesses, and it’s a fixed cost based on the cost of its assets in total. It’s paid once a year.
#7 – Salaries
Irrespective of hours worked, salaries are the fixed compensation paid to the company’s employees. Therefore, the rent and salary paid to every employee of companies every month remains fixed and can be considered a fixed cost example.
#8 – Utility Expenses
The cost of using various utilities like the cost of electricity, gas, phone bills, internet bills, telephone bills, etc., are fixed costs at large.
#9 – Advertising and Promotional Expense
Marketing is a significant expense in any small business budget. A wide range of expenses, such as print and broadcast ads, brochures, marketing campaigns, catalogs, etc., comes under the advertising budget. In addition, activities such as giveaways, contests, focus groups, and surveys come under promotional activity. The expense dollar amount can vary from quarter or year, but it represents a fixed cost.
#10 – Equipment Rental
There is the equipment used for an extended period in various production units, and rental is paid on such equipment. Such equipment rental is fixed in nature and incurs fixed costs.
#11 – Legal Expenses
The expenses incurred in the company’s legal proceedings and regulations formation are fixed in nature and hence are fixed costs.
Conclusion
Fixed expenses are an essential component of a business. It is vital in business to project profit and calculate the break-even point. At the initial stage of business, it should be kept lower as the business’s income will be below. A business will certainly take some time to establish and get customers. Fixed expenses will typically differ based on the business.
Businesses mainly dependent on people rather than physical assets will not have many fixed assets. Some of the businesses are website design, tax preparation, etc. On the other hand, companies, where physical assets are required at large, will have high fixed assets, such as airlines, auto manufacturers, etc. Therefore, we can also conclude that fixed costs are irrelevant to production decisions.
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