GlossaryWhat is a fixed cost?

GLOSSARY

What is a fixed cost?

Fixed costs are stable business expenses. They are set by time, rather than production. Regardless of their business type, business owners must understand their fixed costs so that they can make wise decisions.

Fixed cost (definition)

A fixed cost (also known as an indirect or overhead cost) is an expense that doesn’t change from one month to another. A fixed cost is not impacted by how busy the business is, or by production volume or sales or.  It is a stable business expense. (Without producing anything or making any sales, fixed costs are still incurred.)

Working Capital Definition

Examples of fixed costs

Examples of fixed costs include:

  • rent
  • salaries
  • internet and phone bills
  • insurance
  • some utilities
  • loan repayments
  • property taxes

What is a variable cost?

Variable costs are those expenses that will change in direct relation to business activity, sales, and production.

While fixed and variable costs are both expenses, as the name suggests, fixed costs don’t change in response to production or sales, whereas variable costs do.

Variable costs can include:

  • raw materials
  • inventory or stock
  • packaging
  • shipping fees
  • direct labour.

See related terms

  1. What is marginal cost?
  2. What are fixed assets?
  3. What is cash flow?
     

Additional resources

Disclaimer
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.

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