Fixed costs

Last updated: 27.03.2016

Fixed costs are costs that do not relatively change with the level production over the short term and are incurred even if there is no production. So if the level of production decreases, fixed costs remain unchanged and fixed cost per unit increases, and vice versa.

Examples: CFO salary; rent, insurance or depreciation of production, administrative, selling premises etc.

 

Behavior of fixed costs

 

Compared to variable costs, controllability of fixed costs is much worse.

The vast majority of indirect costs (overheads) are fixed. Exceptionally, fixed can be also some direct production costs as well (e.g. costs of setting-up a production line for a specific product where is the number of units produced irrelevant).

Fixed costs become variable (or rather stepped) in the long term. Let’s give an example on depreciation of production machinery. If the production volume increases over time, it may reach the point at which the output could not be further increased without additional machinery. Therefore, new production machine needs to be acquired and consequently depreciated. In the forthcoming short terms, the higher depreciation will again be fixed. But considering longer period of time, the costs will be variable (or rather step costs). 



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