Fixed costs are ongoing expenses that do not vary based upon sales volume. For example, a bakery will purchase a variable amount of flour based on how many baked goods it anticipates selling. However, the rent on the bakery shop is the same regardless of how many pastries they make or sell.

Types

Common types of fixed overhead are rent, utilities, insurance, loans, legal and permitting fees, salaries and services, such as accounting and software licenses.

Identification

Fixed costs are recurring. One-time costs are investments rather than fixed costs, even if the amount of the expense does not vary based on sales volume.

Significance

Fixed costs begin as soon as the business invests in them, regardless of whether the business is selling products. For example, rent payments start as soon as they lease a store space, even if the store isn't open yet. The business will have to pay fixed costs even if they sell no products at all.

Considerations

It can be difficult to determine what is a fixed cost and what is a variable cost. For example, if you take out a loan to buy a machine, that loan payment is a fixed cost. Maintenance, however, is associated with use, so the more widgets the machine makes the higher the maintenance bill will be. This makes it a variable cost.

Expert Insight

Fixed costs plus variable costs are the denominator when calculating a simple Return On Investment. This means that the lower the fixed costs are in a business, the higher the return on the investment.

Source:

Business Dictionary: Fixed Cost

The Times 100: Fixed, variable costs and break-even

Investopedia: Return On Investment