Of course, this concept only generates outsized profits after all fixed costs for a period have been offset by sales. In the short-term, there tend to be far fewer types of variable costs than fixed costs.Ī business is sometimes deliberately structured to have a higher proportion of fixed costs than variable costs, so that it generates more profit per unit produced. Examples of variable costs are direct materials, piece rate labor, and commissions. The reverse of fixed costs are variable costs, which vary with changes in the activity level of a business. This cost has a variable element, but is largely fixed. This is the cost of electricity, gas, phones, and so forth. This is a fixed compensation amount paid to employees, irrespective of their hours worked. This is a periodic charge for the use of real estate owned by a landlord. This is a tax charged to a business by the local government, which is based on the cost of its assets. This is only a fixed cost if a fixed interest rate was incorporated into the loan agreement. This is the cost of funds loaned to a business by a lender. This is a periodic charge under an insurance contract. This is the gradual charging to expense of the cost of a tangible asset (such as production equipment) over the useful life of the asset. This is the gradual charging to expense of the cost of an intangible asset (such as a purchased patent) over the useful life of the asset.ĭepreciation. Here are several examples of fixed costs:Īmortization. Conversely, a business with low fixed costs can continue to operate profitably even when its sales are low. It is of some importance to understand the extent and nature of the fixed costs in a business, since a high fixed-cost level requires a business to maintain a high revenue level in order to avoid generating losses. This type of cost tends to instead be associated with a period of time, such as a rent payment in exchange for a month of occupancy, or a salary payment in exchange for two weeks of services by an employee. A fixed cost is a cost that does not change over the short-term, even if a business experiences changes in its sales volume or other activity levels.
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