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 includes rent payable, salaries payable, interest expenses and other utilities payable.
The following example provides an outline of the most common fixed costsFixed CostsFixed 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. It is the type of cost which is not dependent on the business activity.. Each example states the topic, the important reasons, and additional comments as needed. Here is the list of 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
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 life of the asset. It does not vary.
#2 – Amortization
AmortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset. is used to lower the cost value of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. for some time. 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. Amortization expense of $10,000 will be incurred as a fixed cost in books.
#3 – Insurance
It is a periodic premium paid under the agreement of policy. For example, the cost of insuring the factory building is a fixed cost irrespective of the number of units produced within the factory.
#4 – Rent Paid
Rent paid for the space that is 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, loan, convertible debtConvertible DebtConvertible debt is a type of debt instrument that can be converted at the company's discretion into equity shares. It is a hybrid security since it combines debt and equity features and provides additional benefits to the holder., or lines of creditLines Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business. from banks and financial institutions is fixed costs, also known as debt expenses.
#6 – Property Taxes
The government imposes a property tax on business, 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 employees of the company. The rent and salary paid to every employee of companies every month remain fixed and can be considered as fixed cost example
#8 – Utility Expenses
It is the cost of the use of various utilitiesVarious UtilitiesUtilities Expenses are the prices incurred by a Company for the usage of utilities like sewage, electricity, waste disposal, water, broadband, heating, & telephone. These are included as operating expenses in the Company’s income sheet. 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 advertising budgetAdvertising BudgetAn advertising budget is an amount of money set aside by a company to promote its products and services through promotional activities such as market surveys, advertisement, creative marketing, and running ad campaigns on print media, digital media and social media., and activities such as giveaways, contests, and 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 units of production, 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 legal proceedings and regulations formation of the company are fixed in nature and hence are fixed costs.
Fixed expenses are an essential component of a business. It is vital in business to project profit and to calculate the break-even point. At the initial stage of business, it should be kept lower as the business’s income will below. A business will certainly take some time for establishment and get customers. Fixed expenses will typically differ based on the business.
Businesses that are mainly dependent on people rather than physical assets will not have many fixed assets. Some of the business is like 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. We can also conclude that fixed costs are not relevant for production decisions.
This article has been a guide to Fixed Cost Examples. Here we discuss the top 11 most common fixed cost examples along with practical application and explanation. You may learn more about accounting from the following articles –