What is a fixed cost?

Published Thursday 23 July 2026

Table of contents

• What are fixed costs?
• How fixed costs work and where they appear
• Fixed costs vs variable costs
• Examples of fixed costs
• How to calculate fixed costs
• How to work out fixed cost per unit
• Why fixed costs matter
• How to reduce and manage fixed costs
• Track your fixed costs with Xero
• FAQs on fixed costs

Key takeaways

• Fixed costs stay the same regardless of how much you produce or sell, so you can plan for them with confidence.
• They show up as operating expenses on your profit and loss statement and are often called overheads or indirect costs.
• To find your total fixed costs, list every expense for the period and add up the ones that don't change with output.
• Fixed costs shape your break-even point and your risk, so keeping them lean gives you more room to move.

What are fixed costs?

Fixed costs are expenses that stay the same no matter how much your business produces or sells. They're the opposite of variable costs, which rise and fall with your activity.

For most Australian small businesses, fixed costs are the steady bills you have to cover every month, like rent and insurance, whether sales are booming or quiet.

How fixed costs work and where they appear

Fixed costs are commitments you've agreed to over a set period, so you have to pay them even in a month with no sales at all. That's what makes them predictable, and it's also why they need careful planning.

On your profit and loss statement, fixed costs sit within your operating expenses, below gross profit. You'll often see them described as overheads or indirect costs, because they support the business as a whole rather than being tied to making one specific product or sale.

Fixed costs vs variable costs

Every cost your business incurs is either fixed or variable, and knowing the split helps you understand how profit responds when sales change. Fixed costs hold steady, while variable costs move up and down with your level of activity.

Variable costs grow as you produce or sell more, such as:

• cost of sales or raw materials
• payment and transaction fees
• sales commissions
• some marketing spend

Some expenses sit in between and are called semi-variable costs. A phone or utility bill often has a fixed base charge plus a usage component that changes month to month. For a closer look at the other side of the split, see the guide to variable costs.

Examples of fixed costs

Fixed costs look a little different for every business, but most Australian small businesses share a familiar set. Common fixed costs include:

• rent or lease of business premises
• council rates
• business insurance
• equipment leases
• permanent salaries and wages
• loan interest
• depreciation of assets
• software subscriptions
• accounting fees

How to calculate fixed costs

Working out your total fixed costs takes 3 straightforward steps. Set a period first, such as a month or a quarter, then follow these steps.

1. List every business expense for the period.
2. Identify which expenses stay the same regardless of output. These are your fixed costs.
3. Add the fixed costs together to get your total fixed costs.

The formula is simple: total fixed costs = sum of all fixed expenses. You can also work it out the other way, as total costs minus total variable costs.

How to work out fixed cost per unit

Fixed cost per unit tells you how much of your fixed costs each item you make has to carry. Divide your total fixed costs by the number of units you produce.

The formula is: fixed cost per unit = total fixed costs ÷ number of units produced. So if your total fixed costs are $60,000 and you produce 5,000 units, your fixed cost per unit is $60,000 ÷ 5,000 = $12.

Fixed cost per unit falls as you produce more, because the same fixed costs are spread across more units. That's the idea behind economies of scale, and it's closely tied to marginal cost, the cost of making one more unit.

Why fixed costs matter

Fixed costs matter because they're simple to predict, which makes them easy to budget for month after month. They also shape 2 big parts of your business: your break-even point and your exposure to risk.

Your fixed costs drive your break-even point, the point where sales cover all your costs. Break-even point = fixed costs ÷ contribution margin per unit, so the higher your fixed costs, the more you have to sell before you turn a profit.

Fixed costs also affect your operating leverage. High fixed costs can mean stronger profits once you pass break-even, since extra sales cost you little to serve. The trade-off is more risk in quiet periods, when those costs keep landing regardless of revenue.

How to reduce and manage fixed costs

Trimming fixed costs frees up cash and lowers the sales you need to break even. Practical ways to reduce and manage your fixed costs include:

• renegotiate leases and supplier contracts
• review insurance and subscriptions regularly
• consider shared or smaller premises
• outsource or use contractors to turn some fixed costs into variable ones
• consolidate software and suppliers

Rising costs are a real pressure for many Australian businesses. According to the Australian Bureau of Statistics, 46% of businesses reported that operating expenses increased, with 65% citing higher business overheads. For more ideas, see the guide on how to cut business costs.

Track your fixed costs with Xero

When your expenses and reports live in one place, staying on top of fixed costs gets a lot easier. Xero helps you record expenses, categorise overheads, and see clear reports so you always know what your fixed costs are.

Sign up for Xero and get one month free.

FAQs on fixed costs

Here are answers to some frequently asked questions about fixed costs.

Is rent a fixed cost?

Yes, rent is a classic fixed cost because you pay the same amount each period regardless of how much you sell. It only changes when your lease is renegotiated or renewed.

Is salary a fixed or variable cost?

Permanent salaries are fixed costs, since you pay them at a set rate no matter your output. Wages tied to hours worked or commissions that rise with sales are variable costs.

Is depreciation a fixed cost?

Yes, depreciation is usually a fixed cost because it's a set amount charged each period for an asset's decline in value. It doesn't change with how much you produce or sell.

Are fixed costs the same as overheads?

They overlap closely, and fixed costs are often called overheads or indirect costs. Overheads are the ongoing costs of running your business that aren't tied to a specific product or sale.

Are fixed costs included in operating costs?

Yes, fixed costs form part of your operating costs and appear as operating expenses on your profit and loss statement. Variable costs make up the rest of your operating costs.