total fixed cost

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

variable cost per unit calculatorhow to depreciate assets in quickbooksvaluation of bonds formulajournal entry accrued interestcarpet depreciation calculatorfifo valuation methodprepare a correct bank reconciliationhow to calculate manufacturing overhead costsbilled customers for services performedaging the accounts receivabledefine administrative costdepreciation in cost of goods soldhow to compute ending inventoryaccrued revenue entrywhat is the double declining balance methodnotes payable formulapresent value interest factor of annuity tablehow to calculate present worthperpetual journal entriesdefine statement of retained earningsvariable costing method income statementexpenses are debits or creditsis land depreciablehow to calculate account receivablecontra entry meaning with exampledirect overhead costtake home pay calculator tennesseereceived cash for services performed journal entryaging of receivables schedulecalculate present value of annuitysalvage value residual valueaging accounts receivableprepaid expenses examplesdepreciation accounting entrieshow to calculate income summaryaverage cost method ending inventorydouble declining balance method calculatornote payable balance sheetwithholding tax compensationstraight line formula accountingclassified balance sheet formatformula for calculating net payhow many is a gross of pencilsmanagerial accounting reportsmerchandise inventory is classified on the balance sheet as aperiodic inventory journal entriesdepreciation calculator straight lineincome statement for merchandising companybasics of accounting entriestrial balance to balance sheet exampleclosing entries for a corporationcalculate fixed cost per unitwhat is uncollectible accountsdouble depreciation formularevenue received in advance journal entrydepreciation of fixed assets journal entryif a company fails to record estimated bad debts expensemanufacturing overhead calculationdefinition of closing entriesbookkeeping journal entries examplesstatement of retained earnings samplewhen is the unearned revenue recognized in the financial statementslifo and fifo methodretained earnings debit or creditthe journal entry to close expense accounts includestarget cost formulahow to calculate overheadswhat is the double declining balance methodmanagerial accounting performance evaluationjournal entry to record accounts payableroi accounting definitionjournal entry for prepaid incomeis prepaid insurance a current assetmethods of inventory valuation with examples