Have you ever heard of examples of fixed costs? If not, then this article is going to be very helpful to you. Because in this article we are going to give you all the basics of fixed costs and also its examples in detail. If you are a married man or woman then it is important for you to know about the fixed costs as an example. Also, the term fixed cost also exists in business. It is not related to a company’s production of any goods or service, it is generally indirect. It can be direct or indirect and may influence profitability at different points on the income statement. Let’s come to the examples of fixed costs.
What Are The Fixed Costs?
What is fixed cost in economics? Well, the fixed cost in economics refers to the cost of business expenses that does not change even with an increase or decrease in the number of goods and services produced or sold.These usually involve recurring costs not directly related to production, such as rent, interest payments and insurance. While in your daily life, fixed costs are those costs that do not change monthly. For example rent and lease, salaries, utility bills, insurance EMI, loan repayment EMI, etc.
The fixed cost associated with doing business can be broken into indirect costs, direct costs, and capital costs on the income statement and notated as either short or long-term liabilities on the balance sheet. Fixed and variable costs together make up the total cost structure of a business. There is a fixed cost formula and it is,
Fixed Cost = Total cost of production – (Variable cost per unit X number of units produced)
You may have various doubts in your minds like, is depreciation a fixed cost, or is advertising a fixed cost? Well, depreciation is one common fixed cost as well as advertising is also a fixed cost. Let’s understand what are examples of fixed costs.
What Are The Examples Of Fixed Costs?
Examples of fixed costs are,
- Insurance
- Amortization
- Depreciation
- Interest Expenses
- Rent
- Salaries
- Utilities
- Property Taxes
Examples Of Fixed Costs
There are lots of examples of fixed costs and variable costs. Let’s elaborate on some examples of fixed costs for a business.
1. Insurance
One of the common examples of fixed costs in the examples of fixed cost and variable costs is insurance. The cost of the insurance premiums for an organization’s property insurance is likely to be a fixed cost. The cost of workers’ compensation insurance is likely to be a variable cost. The cost of insurance for a factory building is a fixed cost when the independent variable is the number of units produced by the factory.
2. Amortization
Amortization is the practice of allocating the cost of an intangible asset over the useful life of the asset. It is also the fixed cost and it is that accumulated portion of the recorded cost of the fixed assets that have been changed to expenses through either depreciation or amortization.
3. Depreciation
Depreciation is an example of fixed cost and expenses are a fixed asset as it is used to reflect its anticipated deterioration. A business develops a depreciation expense plan for an investment in an asset that is declining in value with time. For instance, if a construction company can sell an inoperable crane for parts at a price of $6,000, that is the crane’s depreciated cost or salvage value.
4. Interest Expenses
Interest expenses are the cost of funds loaned to a business by a lender. This is only a fixed cost if a fixed interest rate was included in the loan agreement. For instance, a business borrows $10,000 on August 1 and the interest rate is 4% per month on the principle. The interest expenses for August will be $400.
5. Rent
You may know that rent is an example of fixed cost and it is a monthly or annually charged. A business has to pay this regardless of how many customers serve. For example, a hairdresser will have to pay rent whether they cut one person’s hair or twenty people’s. This may increase with inflation but is fixed for a set period of time.
6. Utilities
One of the common examples of fixed costs in a business among the examples of fixed and variable costs is the cost of utilities. Utility costs include the cost of gas, electricity, phones, trash, sewage services, etc. Some utilities, such as electricity, may increase as production increases. However, utilities are generally considered fixed costs, since the company must pay a minimum amount regardless of its output or profit.
7. Property Taxes
A company owner has to pay property tax regardless of the output or profit of the company. Therefore, property taxes are also considered a fixed cost. This cost remains the same and only changes if the associated property or facility increases in value.
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FAQ
What Is An Example Of Fixed Cost In A Project?
Fixed costs stay the same and do not change throughout the project lifecycle. Examples of fixed costs include setup costs, rental costs, and other related costs.
What Are 4 Examples Of Fixed Costs?
Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments. Some kinds of taxes, like business licenses, are also fixed costs.
Is Electricity A Fixed Cost?
Utilities: Expenses like internet, water, electricity, and heating are all fixed costs for accounting purposes. Although these might vary slightly according to use, they’re predictable, usually similar expenses from month to month.
What Is Not A Fixed Cost?
Wages paid to workers however can vary as the number of workers increase or decrease. Hence it is not considered as a fixed cost.
What Are 3 Examples Of Fixed Costs In A Budget?
Some examples of fixed expenses include:
- Mortgage or rent payments.
- Loan payments, such as auto loans or student loans.
- Insurance premiums, such as for car insurance and homeowners insurance.
- Property taxes.
- Internet and cable bills.
- Childcare expenses.
Conclusion
In the overhead section of the income statement, fixed costs are allocated, which results in operating profit. Depreciation is one common example of fixed cost and we also have discussed it above, which is recorded as indirect expenses. A business develops a depreciation expense plan for an investment in an asset that declines in value over time. All fixed costs in the income statement are recognized in the balance sheet and the statement of cash flows. In simple language, you can say that fixed cost is not dependent on the output or profit of the company and all this is easy to understand with the help of examples of fixed costs.
What are the 6 fixed costs