A:

A fixed cost is a cost that remains the same and does not depend on the amount of goods and services a company produces. It is an expense that a company has to pay and is usually time-related. For example, a fixed cost would be the rent a company pays on a monthly basis.

A variable cost, on the other hand, is a cost that varies as the amount of goods and services a company produces varies. A variable cost is dependent on a company's production volume. For example, suppose company ZYX pays $1 per unit of good sold; its cost would vary as the amount of goods produced varies.

Total costs are comprised of both total fixed costs and total variable costs. Given the total cost and total variable costs, one can find the total fixed costs of a company. One can find total fixed cost by subtracting total variable cost from a company's total cost.

Total fixed costs are the sum of all expenses that are constant that a company must pay. Unlike a fixed cost, which is just one expense, total fixed costs take into account all of the fixed costs a company may have.

For example, suppose a company rents office space for $10,000 a month, machinery for $5,000 a month and pays $1,000 for electricity a month. A fixed cost would be its rent payment, machinery payment or electricity payment. Total fixed cost, on the other hand, pools all of these fixed costs together. In this example, the total fixed cost per month is $16,000.

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 with budgeting and controlling ... Read Answer >>
  2. How Do Fixed and Variable Costs Affect the Marginal Cost of Production?

    Learn about the marginal cost of production and how it is affected by changes in fixed and variable costs. Read Answer >>
  3. Do production costs include all fixed and variable costs?

    Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>
  4. 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 the main difference between them. Read Answer >>
  5. How do fixed costs and variable costs affect gross profit?

    Learn about the differences between fixed and variable costs and find out how they affect the calculation of gross profit ... Read Answer >>
  6. How do you account for changes in the market value of various fixed assets?

    Understand how to account for changes in the fair market value of a company's fixed assets. Learn what accounting methods ... Read Answer >>
Related Articles
  1. Investing

    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.
  2. Investing

    Fixed Income Trader: Career Path & Qualifications

    Discover the career path the most fixed income traders follow and learn more about the qualifications needed and the average salary they earn.
  3. Retirement

    How To Use The 4-Box Strategy For Retirement Income

    In today's volatile market, Generation X can't sit around waiting for things to improve. Gen X must implement innovative strategies for retirement planning.
  4. Investing

    The Economics of Owning a Coffee Shop

    Understand the economics of owning and running a coffee shop. Learn the basics of taking into account fixed, variable, and initial costs.
  5. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  6. Trading

    How To Value Interest Rate Swaps

    An interest rate swap is a contractual agreement between two parties agreeing to exchange cash flows of an underlying asset for a fixed period of time.
  7. Investing

    Avoid The Monthly Payment Trap

    Low monthly payments are easy on the wallet. However, interest and other fees lurk just below the surface.
  8. Managing Wealth

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments—weighing the pros and cons.
  9. Investing

    What Is the True Cost of Owning a Home?

    Buying a home is part of the American dream. But what happens when you add up all the costs associated with buying a home?
RELATED TERMS
  1. Fixed Cost

    A fixed cost is an expense that remains the same regardless of ...
  2. Operating Cost

    Operating costs are expenses associated with the maintenance ...
  3. High-Low Method

    In cost accounting, the high-low method is a way of attempting ...
  4. Fixing

    Fixing is the practice of arbitrarily setting the price of a ...
  5. Variable Cost

    A variable cost is a corporate expense that changes in proportion ...
  6. Marginal Cost Of Production

    Marginal cost of production is the change in total cost that ...
Trading Center