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Fixed Costs

Discuss Fixed Costs within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; In cost accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within ...

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Sunanda K. Chavan
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Fixed Costs - October 29th, 2010

In cost accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales.

Unit fixed costs, called average fixed costs (AFC), decline with volume, following a rectangular hyperbola as the inverse of the volume of production: AFC = FC/N. That is, as the volume of the business goes on increasing, the amount of money spent on production (through fixed costs) of one unit will go on decreasing.


It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Similarly, not all indirect costs are fixed costs; for example, advertising expenses or labour costs are indirect costs that are variable over a slightly longer time frame, as they may not be subject to change in the short term, but may be easily adjustable over a longer time frame.

For example, a firm may not be able to vary the number of employees (and hence labour costs) in the short term due to contract obligations, but be able to lay employees off or otherwise change these costs.
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