What is Fixed Cost in Business? Understand with Examples

Have you ever found yourself wondering why there are certain costs in your business that always remain constant every month, regardless of the changes in production? These are your fixed costs - the costs that are the foundation of any business. Rent, insurance, and salaries do not change with respect to market conditions. 

This is why all business people should be aware of what fixed costs are and their impact on profit margins and stability in the long run.

Now consider this: when you know the clear distinction between fixed cost and variable cost, then you will be more accurate in planning expenditure. If you are able to identify which costs remain constant and which change with production, decision-making is made clear and manageable.

To help you understand fixed cost in detail, we shall discuss fixed cost meaning, fixed cost examples and the difference between fixed cost and variable cost in this blog. 

What is Fixed Cost? 

Fixed cost refers to a business expense that does not change, regardless of the volume of production or sales.

To put it in simple terms, it is the money you will need to spend even when your business is not getting even a single sale. An example of this is your office rent, salaries of employees and insurance premiums, as all these costs are fixed since you pay them monthly regardless of the level of work done.

Fixed costs are therefore constant regardless of your sales or production levels, increasing or reducing, like the base of your business costs.

Difference Between Fixed Cost and Variable Cost

To make smarter business decisions, you must understand the difference between fixed and variable costs clearly. Here’s the table that highlights the difference with examples: 

Aspect	Fixed Cost	Variable Cost
Nature	Remains constant regardless of output	Changes with production levels
Examples	Rent, salaries, insurance	Raw materials, electricity, delivery costs
Timing	Paid periodically	Paid per unit or batch produced
Flexibility	Harder to reduce quickly	Easier to adjust based on sales
Impact on Profit	Affects long-term financial planning	Directly affects short-term profitability

Fixed Cost Examples 

Here are some common examples of fixed costs 

1. Retail Business

• Monthly rent for the store

• Security staff salary

• Electricity connection fees (not usage)

2. Manufacturing Industry

• Depreciation of machinery

• Factory rent

• Maintenance contracts

3. Service-Based Businesses (like CAs, lawyers, IT firms)

• Office lease

• Software subscriptions

• Salaries of administrative staff

4. Startups and Freelancers

• Co-working space fees

• Internet connection

• Premium tools subscription

These are the costs that remain constant even if your business slows down. 

Read More: Difference between Debit Note and Credit Note

How to Calculate Fixed Cost

To calculate total fixed cost, you can use the formula below:

Fixed Cost = Total Cost - (Variable Cost per Unit x Quantity of Units Product)

Suppose that you have a total of ₹1,00,000 monthly expenses. You have 5,000 units and the variable cost per unit is ₹10.

Fixed Cost = 1,00,000 - (10 x 5,000) = ₹50,000

So, ₹50,000 is your fixed cost. It is the expense that you incur despite zero sales.

Break-even point vs. Fixed Cost.

Fixed costs are directly connected to your break-even point, which is the smallest amount of revenue that you need to generate to pay all of your expenses (both variable and fixed).

Here's a simple example:

As long as your total fixed costs are ₹100,000 and your unit-profit margin is ₹10, then:

Break-even point = Fixed Cost/ Profit per Unit = 100,000/10= 10,000 units.

Therefore, 10,000 units will be required to break even. All the rest is profit.

How to Manage Fixed Costs in Your Business

There is no way that you can avoid incurring fixed costs, but you can control them intelligently. Here's how:

Adopt Automation Tools

To increase the efficiency of your overall business, adopt automation tools and software that reduce the burden on manpower. 

Conflict with Flexible Workspaces.

If your team does not require a full-time office, go with co-working or part-time leases. Post-pandemic, many Indian startups are doing this so as to remain lean.

Outsource Non-Essential Operations

Outsource IT, human resources, or support. It maintains your long-term commitment on the lower side.

Review Long-Term Contracts

Review your rental contracts, software agreements and insurance agreements. A modest bargaining may result in huge savings of money per year.

Go Energy Efficient

The cost of your power consumption will be lower in the long term by installing solar panels or energy-saving appliances.

Popular Misconceptions of Fixed Costs

Myth 1: The fixed costs are never variable.

Truth: They will be constant to a given range of activity. As an example, when you open another branch, this will raise your rent (a fixed cost).

Myth 2: Reduction in fixed cost is always beneficial to profits.

Truth: Not always. Certain fixed costs (such as marketing or staff training) are required to grow on a long-term basis.

Myth 3: Fixed costs are not good for the small business.

Truth: Not really. They provide stability and predictability, particularly when the demand is changing.

Read More: Difference Between Accounting and Auditing

Why Fixed Costs Are Important for Financial Planning Of Your Business

Fixed costs help you determine:

• The minimum sales needed for profit.

• The cash reserves are required to sustain your business during the off-season. 

• The right pricing strategy.

When you know your fixed costs, you can plan your other expenses effectively and get complete control over your finances to sustain the business for the long term. 

Key Takeaways

• Fixed cost meaning: Expenses that stay constant irrespective of the production

• Difference between fixed cost and variable cost: Fixed costs remain stable, while variable costs change with production. 

• Fixed cost examples: Rent, insurance, and staff salaries.

• Managing fixed costs can make your business more resilient and profitable.

Final Thoughts

All the Indian entrepreneurs should be familiar with their fixed costs as the back of their hands. Big or small business, knowing where your money is spent will develop a more robust financial discipline.

Therefore, take a moment this week- write down your fixed costs, assess those that add value, and identify points of optimisation. That is the easiest exercise that you can do to come out of ‘just surviving’ to ‘scaling’. 

Frequently Asked Questions 

1. What is a semi-fixed cost?​

A semi-fixed cost (also called a semi-variable cost) is an expense that does not change until a certain activity level is reached, and then steps up beyond that point.

2. What is the average fixed cost?​

The fixed cost divided by the total output is known as Average Fixed Cost (AFC). 

It can be determined by the following formula:

AFC = Total Fixed Cost/ Number of Units Produced.

An example is that, when your monthly rent is ₹50,000 and you produce 1,000 units, the average fixed cost is ₹50/unit. The average fixed cost is low as the production is high.

3. Is depreciation a fixed cost?​

Yes, depreciation is considered a fixed cost.

4. How is the slope of the fixed cost curve?​

A fixed cost curve has a horizontal slope on a graph. This is due to the fact that the level of output does not alter the fixed costs.

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