What is Fixed Cost, Types and Examples
rancakmedia.com – Do you know what fixed costs are? In economics, it is a business cost that does not depend on the amount of goods or services produced by the company.
These expenses relate to time, such as a monthly salary or rent, and are often called incremental expenses.
Company costs that do not affect the company's business volume, both in production and sales, include employee salaries, interest payments, rent, depreciation and insurance costs (fixed costs).
What are Fixed Costs
Fixed costs are costs or expenses of a company that do not change in the amount of goods or services produced, even though the amount of goods and services produced within a certain range has changed. Fixed costs are completely unaffected, or irrespective of changes in the company's business activities.
Fixed costs in accounting are basically a type of cost that does not change or is static and is still incurred regardless of whether no production activity is carried out or if many activities are carried out. For example, fixed costs such as employee salaries. Construction rent, excise fee. These costs must always be paid even if no goods or services are produced by the business.
Fixed costs are charged or included in the indirect expenses section of the income statement that are related to operating income in the production of the report.
Fixed Cost Types
Below are the types of fixed costs, as follows:
1. Fixed Costs Involved
Committed fixed costs or sometimes known as fixed costs that have been set are costs incurred to maintain the viability of the company. The calculated fixed costs relate to investment in facilities and the organizational structure of the business. For example, staff salaries, insurance costs, tax building costs, etc.
The fee is long-term and cannot be changed unilaterally. Therefore, with proper calculations, fixed costs must be determined carefully.
2. Discretionary Fixed Costs
Fixed costs or sometimes called fixed costs are costs incurred in accordance with business management policies. Fixed costs are short-term in nature and can be modified at any time if costs change beyond management's expectations. Examples of these fixed costs include advertising costs, research, training for employees, public relations, and so on.
Example of Fixed Costs
- Depreciation – Depreciation is the progressive and systematic transfer of the cost of a tangible asset. depreciation
- Insurance – Periodic fees must be paid in connection with the insurance contract.
- Interest Expenses – The cost of money lenders lend to businesses.
- Property taxes – taxes on property held by businesses.
- Rent Expenses – Periodic expenses incurred by other parties in the use of property (offices, warehouses, factories, shops), which are used to carry out business operations.
- Salary – The business regularly pays its employees (usually monthly).
Utilities – Electricity bills, phone bills, etc. While components are variable, utilities are included in fixed costs.
Fixed Cost Calculation
Fixed Costp is a cost related to volume or capacity. The main features of fixed costs are that they are fixed and unaffected by period or activity and that the cost per unit is inversely proportional to changes in volume. If the volume or capacity is large, then the fixed cost per unit is low and vice versa.
While the calculation of total fixed costs can be done using the formula for adding fixed costs to variable costs in the production cost analysis.
Basic Differences in Fixed Costs and Variable Costs
Several criteria can be used to differentiate between fixed costs and variable costs.
- The purpose of the evaluation is to identify fixed costs based on time, while variable costs are based on production volume. The total cost to be paid in producing goods or services will be determined by these two investigations.
- The greater the cost per unit, the smaller the fixed costs, the lower the production per unit. This is clearly different from variable costs which are directly related to the number of units or units produced.
- During a certain period of time, fixed costs will always be incurred by business actors, whether production is carried out or not. Meanwhile, variable costs only occur when the production process is complete and there are no production activities.
- Fixed costs in units of production Quantity will not change even if the unit quantity changes. In contrast to variable costs, the number of units produced is different.
The composition of costs, fixed costs or core costs include production overhead costs, cost costs, management costs and distribution costs. While the combination of production material costs, cost of production, used material costs, labor costs and selling costs as well as distribution costs are variable costs.
Below we have summarized some frequently asked questions about fixed costs, as follows:
Can Fixed Costs Change?
Fixed costs or fixed costs are costs incurred by a business sector or company in a constant or fixed state, generally always unchanged despite increasing or decreasing the amount of goods or services produced.
Fixed costs are costs or company expenses that do not change in the amount of goods or services produced. Examples of fixed costs include advertising, research, employee training, public relations, and so on.
Fixed costs are charged or included in the indirect expenses section of the income statement related to operating income in preparing the report. The main features of fixed costs are that they are fixed and are not affected by the period or activity and that the cost per unit is inversely related to changes in volume.
This is clearly different from variable costs which are directly related to the number of units or units produced. The total cost to be paid in producing goods or services will be determined by these two investigations.