What is a fixed cost?
Fixed cost (definition)
Fixed costs are expenses that stay the same no matter how much activity a business is doing. They’re the opposite of variable costs.
Fixed costs have to be paid even if a business doesn’t do any trade for the day. They tend to include regular recurring costs like leases, wages and insurance.
Examples of fixed costs
- Rent of premises
- Property tax
- Insurance
- Utilities (can be variable depending on circumstances)
- Lease of equipment
- Permanent labour (can be variable depending on circumstances)
- Web development
Why fixed costs matter
Fixed costs don’t change much from week to week or month to month. That means it’s relatively simple to predict and budget for them. The higher fixed costs are, the more sales a business has to make in order to break even.
How fixed costs differ from variable costs
A cost is either fixed or variable. It can’t be both.
Variable costs go up and down with your level of business activity. They include things like:
- costs of providing goods or services to customers (cost of sales)
- marketing and sales activity
- transaction fees
See related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.