Fixed Cost

An expense that does not change from time period to time period. For example, a company may rent a piece of property for $4,000 per month. A company often prefers to have fixed costs because they reduce uncertainty, but this is not always possible.

Fig. 42 Fixed costs. (a) The graph represents total payments made for the use of buildings, plant and equipment, etc., which must be met irrespective of whether output is high or low. (b) The graph represents the continuous decline in average fixed cost as output rises, because a given amount of fixed cost is spread over a greater number of units.

fixed costs

any COSTS that do not vary with the level of output because they are linked to a time base rather than to a level of activity (see Fig. 42). Sometimes called period costs, they include rent and rates and depreciation.

Fig. 71 Fixed costs. (a) The graph represents payments made for the use of FIXED FACTOR INPUTS (plant and equipment, etc.) which must be met irrespective of whether output is high or low.

(b) The graph represents the continuous decline in average fixed cost (AFC) as output rises as a given amount of fixed cost is spread over a greater number of units.

fixed costs

any costs that, in the SHORT RUN, do not vary with the level of output of a product. They include such items as rent and depreciation of fixed assets, the total cost of which remains unchanged regardless of changes in the level of activity. Consequently, fixed cost per unit of product will fall as output increases as total fixed costs are spread over a larger output. See Fig. 71 .

In the THEORY OF MARKETS, a firm will leave a product market if in the LONG RUN it cannot earn sufficient TOTAL REVENUE to cover both total fixed costs and total VARIABLE COSTS. However, it will remain in a market in the short run as long as it can generate sufficient total revenue to cover total variable costs and make some CONTRIBUTION towards total fixed costs, even though it is still making a loss, on the assumption that this loss-making situation is merely a temporary one. See MARKET EXIT.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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USEFUL BUDGET ADD-ONS: Adding organic and inorganic growth as well as capacity costs to your budgets can lead to more accurate numbers and greater insight into variances