Q&A - What are fixed costs?
Fixed costs do not change as output varies. In other words, they are fixed even if output moves up or down from period to period.
Examples of fixed costs include:
- Rent & council tax
- Wages and salaries
- Marketing (advertising, market research)
- Insurance, banking & legal fees
- Consultant and adviser costs
- Design and development
- Heating, light and other energy costs
- Leased equipment charges
Note – just because a cost is classified as “fixed”, that does not mean that the cost will stay the same.
For example, the rental of an office or shop will be paid to the landlord. The rent stays the same for a specific period (e.g. 5 years). However, the rent may change (up or down) when the rental agreement is renegotiated when due.
The important point about a cost like rent being fixed is that it has to be paid, whatever the level of sales achieved.
Fixed costs are particularly important when it comes to calculating the break-even output of a business. A business needs to generate enough contribution (a kind of profit) to cover its fixed costs in order for it to break-even.
The higher the level of fixed costs in a business, the higher must be the achieved output in order to break-even.
As a result, a good strategy for most start-ups is to focus on controlling and minimising fixed costs.