Some Ideas For Fixed expenses: What You Need to Know

A Fixed expense is an expense that does not change when sales or production volumes increase or decrease. Fixed expenses are the expenses a business incurs that do not change with the amount of goods produced or services provided.

These costs are not directly associated with manufacturing a product or delivering a service. Consequently, fixed expenses are considered to be indirect costs, like semi-variable costs, and will usually be listed as operating expenses on a company’s income statement.

Business owners need to know their fixed expenses because they need to pay them regardless of whether the business made any income. This knowledge will help them better determine the current and future financial needs of their company and to perform a break-even analysis. So What is a fixed expense?

How to calculate fixed expenses?

Business owners can calculate their fixed expenses by employing a three-step process:

Identify all expenses

Make a list of all of your expenses. Review documents such as receipts, bank statements, employment and commercial lease agreements, and other contracts. Convert all expenses to a monthly calculation. If the expense is recurrent on an annual basis, divide it by 12 to obtain a monthly amount.

Determine which expenses are fixed expenses

Using your list of expenses, identify the costs that remain the same regardless of sales or activity volume. Those are your fixed expenses.

Add up all the fixed expenses

Once you have identified all your fixed expenses, add them all together: The sum of these costs will be your company’s fixed expenses. Each month, you will need to pay these expenses regardless of the amount of goods you produce or services you provide, unless they are an annual expense, like insurance. In these cases, the expense will be paid annually, but you will also recognize it as a monthly expense on your income statement

Finding Fixed expenses in your financial statements

Fixed expenses are typically recorded in a company’s income statement. They are usually listed under operating expenses or selling, general, and administrative expenses.

What are examples of fixed expenses?

Fixed expenses include a variety of expenses that are similar across companies and industries, unlike variable costs, which tend to be industry-specific. Taking a manufacturing company as an example in the table below, the fixed expenses include expenses such as rent for the factory, property taxes, salaries of executives, depreciation on equipment, and insurance premiums. These expenses are independent of the level of production or sales.

Is it true that rent never changes?

Since the monthly payment is the same regardless of the volume of goods or services transacted, most businesses classify rent as a fixed cost. The monthly rent payment is established in the rental or lease agreement and does not change until the lease ends or is renegotiated. Fisher argues that it is a fixed cost “because it does not vary with the level of sales activity.”

Conclusion

Employee compensation costs may be either constant or semi-variable depending on the specifics of the pay structure. Salaries, for instance, are an example of a fixed expense since they typically do not fluctuate in response to changes in sales volume.