Fixed Costs are costs that are fixed and do not change, regardless of fluctuations in the company's production or sales.
Even though it is sometimes considered trivial, a good understanding of Fixed Costs is the key to efficient financial management for every business.
In this article, let's take a thorough look at Fixed Costs, starting from the definition, examples, to the types. Listen until the end, OK!
Fixed Costs are costs that must be paid by the company and the amount does not change even if the company produces more or less goods or services.
Examples are business premises rental costs, loan interest payments, insurance, depreciation (the reduced value of assets over time), and property taxes.
For example, imagine you own a shop. Even if your shop sells more goods or fewer goods in one month, you still have to pay building rent and other fixed costs every month. Even if the shop has to stop operating temporarily, you still have to pay the Fixed Cost.
On the other hand, costs that change according to the number of goods or services produced or sold are called variable costs. For example, the cost of raw materials to make a product is a Variable Cost because it will increase if the company produces more products.
As previously mentioned, Fixed Costs are like monthly bills that you have to pay.
For example, you open a clothing store business. Every month, there are definitely a number of bills that must be paid, such as rent for shop premises, salaries of permanent employees, insurance, property taxes, and perhaps also interest costs for business loans.
Well, all of these bills are examples of Fixed Costs. Here are some examples of Fixed Costs and their explanations:
Rental costs for office or factory space are examples of Fixed Costs. Even though production or sales volumes change, rental fees must still be paid every month.
The salary paid to company employees is Fixed Cost. Even though working hours or production change, salaries are still paid each period.
Costs for utilities such as electricity, gas, or telephone are Fixed Costs. Although its use may change.
The cost of insurance premiums, such as company health insurance or fire insurance for buildings, is a Fixed Cost that the company must pay at certain intervals, usually every month or year.
The interest costs paid on company loans or debt are Fixed Costs. Even though the amount of debt or loan may change, the amount of interest costs remains.
This is a Fixed Cost that occurs when the value of an asset owned by a company, such as machinery or buildings, decreases over time. Even though the value of the asset decreases, the depreciation expense for the asset remains the same each period.
The tax that a company must pay on the property or assets it owns is Fixed Cost. Although the tax amount may change, the cost of property taxes remains the same every year.
Knowing about Fixed Costs is very important because it helps you make the best decisions in managing business finances.
Imagine you are developing a business with different branches or departments. Of course, you want to make sure that the business is profitable as a whole, right? Well, sometimes you also have to think whether there are branches or departments that are less profitable. At such times, it is important for you to understand the different types of Fixed Costs and analyze their profitability in more depth.
The following are several types of Fixed Costs:
Separable Fixed Cost is a Fixed Cost that is specifically related to a particular part or business unit. This means that these costs are not mixed with other Fixed Costs in the business.
For example, a company has two departments, namely department A and department B. Each department has its own Fixed Cost.
Now, if the company decides to close one of the departments, say department B. Then the Fixed Costs associated with department B will also stop.
However, Fixed Costs related to department A will not be affected and will continue as usual.
Discretionary Fixed Cost is a Fixed Cost that can be increased or reduced after a certain period of time.
These costs do not change due to increases or decreases in the amount of sales or production, but are related to a period of time.
For example, you spend money on advertising for 5 years and promote your product brand.
After 5 years, when the brand is well known, then you can decide to reduce advertising costs. Or, if you want to market your product in another country, you may decide to increase your advertising costs there.
Here are some examples of Discretionary Fixed Cost:
So, the bottom line is that Discretionary Fixed Cost gives you the flexibility to change it according to company decisions and strategies after a certain period of time.
Committed Fixed Costs are Fixed Costs that must be paid by the company regardless of whether other departments or branches are operating or not.
Committed Fixed Costs are often long-term commitments that a company has taken on and cannot be changed quickly. Even if the level of activity or sales changes, these costs must still be paid.
The following are some examples of Committed Fixed Costs:
Thus, the discussion regarding Fixed Costs. By understanding the role and influence of Fixed Costs, you can take wiser steps in managing company finances.
If you want to find out more about the importance of Fixed Costs for companies, join the Marketing Pricing Strategy program now! Click here to sign up!
Fixed Costs are costs that are fixed and do not change, regardless of fluctuations in the company's production or sales.
Even though it is sometimes considered trivial, a good understanding of Fixed Costs is the key to efficient financial management for every business.
In this article, let's take a thorough look at Fixed Costs, starting from the definition, examples, to the types. Listen until the end, OK!
Fixed Costs are costs that must be paid by the company and the amount does not change even if the company produces more or less goods or services.
Examples are business premises rental costs, loan interest payments, insurance, depreciation (the reduced value of assets over time), and property taxes.
For example, imagine you own a shop. Even if your shop sells more goods or fewer goods in one month, you still have to pay building rent and other fixed costs every month. Even if the shop has to stop operating temporarily, you still have to pay the Fixed Cost.
On the other hand, costs that change according to the number of goods or services produced or sold are called variable costs. For example, the cost of raw materials to make a product is a Variable Cost because it will increase if the company produces more products.
As previously mentioned, Fixed Costs are like monthly bills that you have to pay.
For example, you open a clothing store business. Every month, there are definitely a number of bills that must be paid, such as rent for shop premises, salaries of permanent employees, insurance, property taxes, and perhaps also interest costs for business loans.
Well, all of these bills are examples of Fixed Costs. Here are some examples of Fixed Costs and their explanations:
Rental costs for office or factory space are examples of Fixed Costs. Even though production or sales volumes change, rental fees must still be paid every month.
The salary paid to company employees is Fixed Cost. Even though working hours or production change, salaries are still paid each period.
Costs for utilities such as electricity, gas, or telephone are Fixed Costs. Although its use may change.
The cost of insurance premiums, such as company health insurance or fire insurance for buildings, is a Fixed Cost that the company must pay at certain intervals, usually every month or year.
The interest costs paid on company loans or debt are Fixed Costs. Even though the amount of debt or loan may change, the amount of interest costs remains.
This is a Fixed Cost that occurs when the value of an asset owned by a company, such as machinery or buildings, decreases over time. Even though the value of the asset decreases, the depreciation expense for the asset remains the same each period.
The tax that a company must pay on the property or assets it owns is Fixed Cost. Although the tax amount may change, the cost of property taxes remains the same every year.
Knowing about Fixed Costs is very important because it helps you make the best decisions in managing business finances.
Imagine you are developing a business with different branches or departments. Of course, you want to make sure that the business is profitable as a whole, right? Well, sometimes you also have to think whether there are branches or departments that are less profitable. At such times, it is important for you to understand the different types of Fixed Costs and analyze their profitability in more depth.
The following are several types of Fixed Costs:
Separable Fixed Cost is a Fixed Cost that is specifically related to a particular part or business unit. This means that these costs are not mixed with other Fixed Costs in the business.
For example, a company has two departments, namely department A and department B. Each department has its own Fixed Cost.
Now, if the company decides to close one of the departments, say department B. Then the Fixed Costs associated with department B will also stop.
However, Fixed Costs related to department A will not be affected and will continue as usual.
Discretionary Fixed Cost is a Fixed Cost that can be increased or reduced after a certain period of time.
These costs do not change due to increases or decreases in the amount of sales or production, but are related to a period of time.
For example, you spend money on advertising for 5 years and promote your product brand.
After 5 years, when the brand is well known, then you can decide to reduce advertising costs. Or, if you want to market your product in another country, you may decide to increase your advertising costs there.
Here are some examples of Discretionary Fixed Cost:
So, the bottom line is that Discretionary Fixed Cost gives you the flexibility to change it according to company decisions and strategies after a certain period of time.
Committed Fixed Costs are Fixed Costs that must be paid by the company regardless of whether other departments or branches are operating or not.
Committed Fixed Costs are often long-term commitments that a company has taken on and cannot be changed quickly. Even if the level of activity or sales changes, these costs must still be paid.
The following are some examples of Committed Fixed Costs:
Thus, the discussion regarding Fixed Costs. By understanding the role and influence of Fixed Costs, you can take wiser steps in managing company finances.
If you want to find out more about the importance of Fixed Costs for companies, join the Marketing Pricing Strategy program now! Click here to sign up!
