Fixed Cost

Loading the player...

What is a 'Fixed Cost'

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

BREAKING DOWN 'Fixed Cost'

An example of a fixed cost would be a company's lease on a building. If a company has to pay $10,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full.

In economics, a business can achieve economies of scale when it produces enough goods to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets means that each widget carries with it $1 in fixed costs. If the company produces 200,000 widgets, the fixed cost per unit drops to 50 cents.

RELATED TERMS
  1. Operating Cost

    Expenses associated with the maintenance and administration of ...
  2. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  3. Full Costing

    A managerial accounting method that describes when all fixed ...
  4. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
  5. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  6. Variable Cost

    A corporate expense that varies with production output. Variable ...
Related Articles
  1. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  2. Investing

    What are Direct Costs?

    Direct costs for finished goods refer to the items and services directly used in production. Other costs such as rent and insurance for the production site are indirect costs. These costs may ...
  3. Investing

    Understanding Cost Accounting

    Cost accounting is the method of financially allocating expenses to goods that are manufactured for resale. Cost accounting is also referred to as managerial accounting, because managers use ...
  4. Economics

    Calculating Production Costs

    Production cost is any expense associated with manufacturing a good or providing a service.
  5. Economics

    What Are The Different Types Of Costs In Cost Accounting?

    Cost accounting measures several different types of costs associated with a company’s production processes.
  6. Economics

    Explaining Prime Cost

    Prime cost is a way of measuring the total cost of the production inputs needed to create a given output.
  7. Economics

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  8. Fundamental Analysis

    The Operating Leverage And DOL

    Operating leverage tells investors about the relationship between a company's fixed and variable costs. The higher a company's fixed costs in relation to its variable costs, the greater its operating ...
  9. Investing

    Variable Costs

    Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to ...
  10. Economics

    What Does Short Run Mean?

    Short run is the concept that for a business, at least one factor of production is fixed while others are variable.
RELATED FAQS
  1. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  2. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
  3. What's the difference between the production cost and the manufacturing cost?

    Learn more about fixed and variable expenses incurred by businesses. Find out how production and manufacturing costs impact ... Read Answer >>
  4. Is it better for a company to have fixed or variable costs?

    Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
  5. What is the difference between variable cost and fixed cost in economics?

    Learn what total costs are comprised of, what variable costs and fixed costs are and what the main difference between fixed ... Read Answer >>
  6. What are the different types of costs in cost accounting?

    Learn about the different types of costs associated with cost accounting, such as direct, indirect, fixed, variable and operating ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center