Fixed costs can be a tricky business. They might seem simple but if you think too much, you might get tripped up.

Just like with variable cost, fixed costs are named because of how the cost behaves in total. It is fixed. It does not change. Now most students will take that to mean that the cost will never change. If that were the case, there is not a fixed cost on the planet. All costs change over time. Remember, we are taking about how a cost behaves today.

A fixed cost does not have an activity or driver that makes the cost increase as the activity or driver increases. Let’s say you start a business and the rent for 500 square feet is $1000 per month for the first three years. Is there an activity or driver that would increase your rent expense?

Number of hours open? Nope

Number of customers per month? Nope

Amount of sales in units or dollars? Nope

And here is the most important question: if all of your drivers go to zero, does the cost go to zero as well? If you go on vacation for a month and close your business so there are no sales, no customers, nada is your rent expense zero? Nope

With a variable cost, when the driver was zero, the total variable cost was zero. With a fixed cost, that is not the case.

Remember our candy bar example from the post on variable cost? What if, in order to sell the candy bars on campus, you needed to pay a fee of $100 to the college. Is that a fixed cost or a variable cost? It is fixed because it does not change no matter how many (or how few) candy bars you sell.

Here is the graph for fixed cost:

Total Fixed Cost

Notice on this graph, there is no slope. The formula for total fixed cost = fixed cost. If looking at the equation for a line y = 0 + b, where b is equal to fixed cost. As long as you are within the relevant range, the formula is valid.

Related Videos

Cost Behavior: Fixed, Variable, Step and Mixed 

Fixed and Variable costs as per unit and total costs

Share This:


Related pages


perpetual accounting journal entriesperiodic and perpetual inventory definitionaccount receivable aging schedulesales return allowanceabsorption costing method examplewhat is an overhead rateasset turnover calculationhow to calculate accounts payable on balance sheetprovision for bad debts accounting entrydepreciation using the declining balance methodcogs formula income statementbond accrual calculationjournal entry of provision for bad debtssupplies expense adjusting entryis accounts payable a debit or creditcalculating ending inventorylist of factory overhead expensescalculating ending inventorywhere can closing entries be foundcontribution margin formulaproduct cost under absorption costingaccounting adjusting journal entry exampleslifo inventory methodmeaning of profit centrejournaling accountingwhat is an overhead ratebest financial accounting bookretained earning statementdeposit in transit journal entrydouble declining depreciation formulaabsorption costing exampleexamples of cogscost of merchandise sold equals beginning inventorydefine debit balancefactory overheadscompanies that use job costingpaycheck take home pay calculatorpv of bond formulacalculate treasury stockcontrollable margin formulashare based payments journal entriesdouble decline depreciation calculatordirect and absorption costingordinary annuity calculator present valueinterest payable journal entrypercentage sales methodaccounts payable credit or debitdouble declining depreciation methodpresent value of a annuityfiguring out payroll taxesadjusting entry for unearned rentadjusted trial balance worksheetaccounting for merchandise inventorybond maturity date calculatormerchandise inventory isunearned revenue journal entriesfinished goods inventory formulawhat is an adjusting entryservice charge reconciliationtrial balance definition in accountingoffice supplies expense accountingyearly depreciation formulaunearned revenue is a liabilitywhat are fixed overheadsfactory overhead accountingfederal withholding tax returnjournal entry for salary paid in advanceadjustments to retained earningsoffice supplies accounting definitionhow to calculate fixed cost per unitentry for prepaid insuranceaccounting period costshow to compute contribution margin ratio