Fixed Cost

AAA

DEFINITION of 'Fixed Cost'

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  2. Chasing Nickels Around Dollar Bills

    A slang term describing what a company's management does when ...
  3. Variable Cost

    A corporate expense that varies with production output. Variable ...
  4. Absorption Costing

    A managerial accounting cost method of expensing all costs associated ...
  5. Operating Expense

    A category of expenditure that a business incurs as a result ...
  6. Relevant Cost

    A managerial accounting term that is used to describe costs that ...
RELATED FAQS
  1. How can a firm bring down its operating leverage?

    A company with a lower percentage of fixed costs and a higher percentage of variable costs uses less operating leverage. ... Read Full Answer >>
  2. How do fixed and variable costs each affect the marginal cost of production?

    The total cost of a business is comprised of fixed costs and variable costs. Fixed costs and variable costs affect the marginal ... Read Full Answer >>
  3. What is the difference between direct costs and variable costs?

    Direct costs and variable costs are expenses associated with production. Direct costs are expenses that can be directly traced ... Read Full Answer >>
  4. How can I use the load factor as an indicator for the profitability of the airline ...

    A high load factor indicates that an airline has full planes with most seats occupied by passengers. Airlines have high fixed ... Read Full Answer >>
  5. How does a company determine the right level of sales volume?

    A company determines the right level of sales volume by conducting a cost-volume-profit analysis. This helps a company figure ... Read Full Answer >>
  6. What are the different types of costs in cost accounting?

    Cost accounting is an accounting process that measures and analyzes the costs associated with products, production and projects ... Read Full Answer >>
  7. What impact does weather have on my investment in the airline industry?

    Weather changes may result in canceled flights and substantial losses for both consumers and the airline industry. Business ... Read Full Answer >>
  8. What are the main arguments in favor of the privatization of public goods?

    Public goods are defined by two characteristics. One is non-excludability, which means that even those who don't pay for ... Read Full Answer >>
  9. What are the three "nets" of an NNN lease?

    A triple net (NNN) lease is a type of real estate lease in which the tenant is responsible for paying the building's property ... Read Full Answer >>
  10. Is it better for a company to have fixed or variable costs?

    It is not necessarily better or worse for a company to have either fixed costs or variable costs. In fact, most companies ... Read Full Answer >>
  11. How does fixed overhead differ from varied overhead?

    Overhead costs are ongoing expenses a business incurs in its operations. They must be paid even if a company has a low volume ... Read Full Answer >>
  12. What sorts of factors increase cash flow from operating activities?

    Cash flow from operating activities is calculated by adding net income, total non-cash expenses and net change in working ... Read Full Answer >>
  13. How are semi-variable costs similar to fixed costs?

    Semi-variable costs and fixed costs are similar. Semi-variable costs consist of fixed costs and variable costs. A fixed cost ... Read Full Answer >>
  14. What is the difference between fixed cost and total fixed cost?

    A fixed cost is a cost that remains the same and does not depend on the amount of goods and services a company produces. ... Read Full Answer >>
  15. What is the difference between variable cost and fixed cost in economics?

    In economics, variable cost and fixed cost are the two main costs a company has when producing goods and services. A company's ... Read Full Answer >>
  16. How can Economic Order Quantity be used to lower inventory costs?

    Economic order quantity determines the optimal number of units a company should hold in its inventory. It determines the ... Read Full Answer >>
  17. What is the difference between gross profit, operating profit and net income?

    The terms profit and income are often used interchangeably in day-to-day life. In corporate finance, however, these terms ... Read Full Answer >>
  18. Are marginal costs fixed or variable costs?

    Marginal costs are a function of both fixed and variable costs. Fixed costs of production are considered the costs that occur ... Read Full Answer >>
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 Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  3. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  4. Personal Finance

    Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  5. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  6. Budgeting

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  7. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  8. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  9. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  10. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center