fbpx

Fixed Costs

Fixed Costs Definition

Fixed costs are costs that remain constant in total within a relevant range of volume or activity. The concept of the relevant range is important here. Relevant range is the range of activity in which a company expects to operate.

Or

Fixed Cost is one which does not vary but remains constant within a given period of time. It also remains within a particular range of activity despite fluctuations in the volume of production.

Examples

Examples of fixed costs include depreciation, salary of a plant superintendent, rent, advertising, insurance, etc.

Explanation

Fixed costs or constant costs are those which are not affected by increase or decrease in production of these are those costs which remain fixed for a given period in spite of the changing in the volume of production.


However, for practical purposes, the notion of fixed cost may be slightly modified. Fixed cost can be expected to change over time due to certain variations, e.g., rent may increase or decrease or taxes may go up, due to factors independent of the firm’s activity. Thus a cost is fixed only within a limited time period. Hence the reference to a particular time period is essential to the concept of fixed costs because all costs tend to be variable in the long run. The diagram below illustrates the concept of fixed costs:

Fixed Costs

Total fixed costs are shown by a straight line drawn parallel to free horizontal axis because fixed costs do not respond to changes in volumes or activity.

Characteristics of Fixed Costs

  1. This cost is fixed in total for a given period of time.
  2. Per unit fixed cost decreases as output increases and increases as output decreases.
  3. Its allocation to departments or cost centers generally made by managerial decisions usually by various cost apportionment methods.
  4. Top management, not the departmental supervisors are responsible to control this cost.
  5. These costs are not fixed for a long period.

Leave a Comment