What Are Fixed Costs in Accounting?

Costs are an important part of accounting. Regardless of their operations or size, all businesses have costs. You can’t run a business without paying for goods and services. There are different types of costs, however, one of which being fixed. Fixed costs are still expenses, but they have unique characteristics that distinguish them from other expenses. What are fixed costs in accounting exactly?

Overview of Fixed Costs

Fixed costs are expenses that remain static and unchanged regardless of sales volume. The number of sales your business generates may affect certain costs. Other costs, though, will remain unchanged. Fixed costs fall under the latter category. Whether your business generates more sales or fewer sales, its fixed costs will remain unchanged.

Common types of fixed costs include the following:

  • Lease payments
  • Electric bills
  • Water bills
  • Payroll
  • Insurance
  • Taxes
  • Interest fees on debt

With fixed costs, your business’s sales volume won’t affect how much you spend. They are known as “fixed costs” because they are fixed. Your business’s sales volume will inevitably change. Whether it goes up or down, though, your business’s fixed costs will remain the same.

Fixed vs Variable Costs

There are also variable costs in accounting. Variable costs are essentially the opposite of fixed costs. While fixed costs remain static and unchanged regardless of sales volume, variable costs live up to their namesake by changing. As your business’s sales volume increases or decreases, its variable costs will change.

Generally speaking, an increase in sales volume will lead to higher variable costs. A decrease in sales volume, on the other hand, will lead to lower variable costs. Inventory is typically considered a variable cost. If your business sells products — whether in store or online — you’ll have to purchase those products from a vendor. This inventory will directly affect your business’s variable costs. Variable costs are simply expenses that increase or decrease in response to your business’s sales volume.

In Conclusion

Business-related expenses can often be classified as either fixed costs or variable costs, depending on whether they are influenced by sales volume. Fixed costs are expenses that aren’t influenced by sales volume. In comparison, variable costs are expenses that are directly influenced by sales volume. By understanding the differences between them, you can keep cleaner accounting reports that accurately reflect your business’s true expenses.

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