A fixed cost is a cost that doesn’t vary depending on how many goods and services you sell. The opposite of fixed cost is a variable cost.
A fixed cost is a business expense that doesn’t change when the amount of goods and services you produce and sell increases or decreases. Examples of fixed costs are rental costs, insurance and the interest you pay on loans. Depreciation is also a type of fixed cost.
Variable cost versus fixed cost
A variable cost is connected to production and sales, and increases if sales and production increase, such as packaging costs, shipping costs, or the purchase of raw materials. Fixed costs and variable costs make up your total costs.
Fixed costs don’t change in relation to your production and sales. They’re usually established by contractual agreements, such as an insurance contract. Their price don’t change for that period of time.
What do you use fixed costs for?
To work out your cost price—how much it costs you to produce a good or deliver a service—you need to include both your fixed costs and variable costs. It doesn’t matter if you sell enough to cover your variable costs, if you then have rent and insurance on top of that. Then you’ll be running at a loss.
When your business is able to cover all of its fixed costs, it hits what’s called the break-even point. To work out your break-even point, you first have to know how much your fixed costs amount to. Hitting the break-even point is the sign of a profitable business.
You also have to include fixed costs in two reports—the balance sheet and cash flow statement— which you submit as part of your annual report. The annual report is meant to give an accurate and up-to-date overview of the financial health of your business.