Fixed Cost Examples Top 11 Examples Of Fixed Cost With Explanation

Fixed Cost Examples

The following example provides an outline of the most common fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more. Each example states the topic, the important reasons, and additional comments as needed. Here is the list of the top 11 most common Fixed Costs –

#1 – Depreciation#2 – Amortization#3 – Insurance#4 – Rent Paid#5 – Interest Expense#6 – Property Taxes#7 – Salaries#8 – Utility Expenses#9 – Advertising and Promotional Expense#10 – Equipment Rental#11 – Legal Expenses

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Fixed Cost Examples (wallstreetmojo.com)

Let us discuss each one of them in detail –

Top 11 Most Common Examples of Fixed Cost

#1 – Depreciation

The gradual writing-off of a tangible asset over its life is called depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more. It is a fixed cost as it is incurred with the same value over the asset’s life. It does not vary.

#2 – Amortization

AmortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company’s various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more is used to lower the cost value of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more. It also includes the repayment of a loan. For example, suppose ABC Corporation spends $50,000 to acquire a patent that will expire in 5 years. It should be amortized over the five years before it expires. An amortization expense of $10,000 will be incurred as a fixed book cost.

#3 – Insurance

It is a periodic premium paid under the agreement of policy. For example, insuring the factory building is a fixed cost irrespective of the number of units produced within the factory.

#4 – Rent Paid

The rent paid for the space used to conduct the business is a fixed cost. This amount is not dependent on the performance of the company. Even for a retail shop, rent is fixed and is not dependent on the number of sales.

#5 – Interest Expense

Interest ExpenseInterest ExpenseInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more against any borrowings like bonds, loans, convertible debtConvertible DebtConvertible debt is a type of debt instrument that can be converted at the company’s discretion into equity shares. It is a hybrid security since it combines debt and equity features and provides additional benefits to the holder.read more, or lines of creditLines Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business.read more from banks and financial institutions is fixed costs, also known as debt expenses.

#6 – Property Taxes

The government imposes a property tax on businesses, and it’s a fixed cost based on the cost of its assets in total. It’s paid once a year.

#7 – Salaries

Irrespective of hours worked, salaries are the fixed compensation paid to the company’s employees. Therefore, the rent and salary paid to every employee of companies every month remains fixed and can be considered a fixed cost example.

#8 – Utility Expenses

The cost of using various utilitiesVarious UtilitiesUtilities Expenses are the prices incurred by a Company for the usage of utilities like sewage, electricity, waste disposal, water, broadband, heating, & telephone. These are included as operating expenses in the Company’s income sheet. read more like the cost of electricity, gas, phone bills, internet bills, telephone bills, etc., are fixed costs at large.

#9 – Advertising and Promotional Expense

Marketing is a significant expense in any small business budget. A wide range of expenses, such as print and broadcast ads, brochures, marketing campaigns, catalogs, etc., comes under the advertising budgetAdvertising BudgetAn advertising budget is an amount of money set aside by a company to promote its products and services through promotional activities such as market surveys, advertisement, creative marketing, and running ad campaigns on print media, digital media and social media.read more. In addition, activities such as giveaways, contests, focus groups, and surveys come under promotional activity. The expense dollar amount can vary from quarter or year, but it represents a fixed cost.

#10 – Equipment Rental

There is the equipment used for an extended period in various production units, and rental is paid on such equipment. Such equipment rental is fixed in nature and incurs fixed costs.

#11 – Legal Expenses

The expenses incurred in the company’s legal proceedings and regulations formation are fixed in nature and hence are fixed costs.

Conclusion

Fixed expenses are an essential component of a business. It is vital in business to project profit and calculate the break-even point. At the initial stage of business, it should be kept lower as the business’s income will be below. A business will certainly take some time to establish and get customers. Fixed expenses will typically differ based on the business.

Businesses mainly dependent on people rather than physical assets will not have many fixed assets. Some of the businesses are website design, tax preparation, etc. On the other hand, companies, where physical assets are required at large, will have high fixed assets, such as airlines, auto manufacturers, etc. Therefore, we can also conclude that fixed costs are irrelevant to production decisions.