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.
Fixed Cost Examples
The following fixed cost example provides an outline of the most common fixed costs. A fixed cost is that expense which remains constant irrespective of the volume of sales. Irrespective of kind of business, the volume of business and type of business, fixed costs are expenses incurred by the company anyhow and it is to be born and have to be paid the company. To achieve higher levels of revenues and to break-even the production, fixed costs are required. It is impossible to provide a complete set of examples that address every variation in every situation since there are thousands of such fixed costs. Each example of the fixed cost states the topic, the relevant 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 12 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
Amortization is used to lower the cost value of intangible asset a period of time. It also includes 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
This 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
#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
This is the cost of the use of 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 major 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 budget 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 equipment used for an extended period of time 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 important component of a business. It is very important in business to project profit and to calculate the break-even point. At the initial stage of business, it should be kept lower as businesses income will be low. A business will certainly take some time for establishment and get customers. Fixed expenses will typically differ based on the business.
Businesses that are largely 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 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 –