Fixed cost

Published Wednesday 12 August 2026

Table of contents

• What is a fixed cost?
• Examples of fixed costs
• Fixed costs vs variable costs
• How to calculate fixed costs
• Average fixed cost (fixed cost per unit)
• Where fixed costs appear in your financial statements
• Why fixed costs matter
• Take control of your fixed costs with Xero
• FAQs on fixed costs
• Related terms
• Learn more about fixed costs

Key takeaways

• A fixed cost is a business expense that stays the same regardless of how much you produce or sell, such as rent, insurance, and permanent salaries.
• Fixed costs are the opposite of variable costs, which rise and fall with your level of business activity.
• You can find your total fixed costs by listing all business costs, separating the fixed ones from the variable ones, and adding them up.
• Higher fixed costs raise the level of sales you need to break even, so tracking them closely helps protect your profit.

What is a fixed cost?

A fixed cost is a business expense that stays the same regardless of how much a business produces or sells. Whether you make one product or a thousand, these costs remain constant over a set period.

Fixed costs are the opposite of variable costs, which rise and fall with production or sales volume. You might also hear fixed costs called overhead costs or indirect costs, since they're not directly tied to the goods or services you deliver.

Understanding your fixed costs helps you budget more accurately and work out how much revenue you need to cover your expenses before turning a profit.

Examples of fixed costs

Most businesses have several types of fixed costs that recur each month or year. Here are some common examples:

• Rent or premises lease
• Insurance
• Salaries of permanent staff
• Interest on loans
• Depreciation of equipment
• Property rates
• Subscriptions and licences

Fixed costs vs variable costs

Fixed costs stay constant no matter how much you produce or sell. Variable costs, on the other hand, rise and fall in direct proportion to your output. When you sell more, variable costs increase; when you sell less, they decrease.

Here are some common variable costs:

• Cost of sales
• Raw materials
• Sales commission
• Transaction fees
• Packaging

Knowing the difference between fixed and variable costs helps you price your products, forecast cash flow, and identify where you can cut spending.

How to calculate fixed costs

To find your total fixed costs, you need to separate them from your variable costs. Use this formula:

Fixed costs = total costs − (variable cost per unit × number of units produced)

Follow these steps to calculate your fixed costs:

1. List all your business costs.
2. Separate the fixed costs from the variable costs.
3. Add up the fixed costs to get your total fixed cost.

Average fixed cost (fixed cost per unit)

Average fixed cost is the total fixed cost divided by the number of units produced. It tells you how much of your fixed costs each unit must cover. Use this formula:

Average fixed cost = total fixed costs ÷ number of units produced

The more units you produce, the lower your average fixed cost per unit becomes. For example, if your total fixed costs are R10,000 and you produce 100 units, your average fixed cost is R100 per unit. Produce 200 units and it drops to R50 per unit.

Where fixed costs appear in your financial statements

Fixed costs usually sit under operating expenses on your income statement. They're recorded separately from your cost of sales, which covers the direct costs of producing goods or services.

You might see fixed costs grouped as overhead costs or administrative expenses. Tracking them separately from variable costs gives you a clearer picture of your profit margins and helps you spot opportunities to reduce spending.

Why fixed costs matter

Fixed costs are predictable and easy to budget for, which makes financial planning simpler. However, higher fixed costs mean your business must make more sales to break even.

South African businesses recorded an average after-tax profit margin of just 1.3% in 2024, according to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research, so keeping fixed costs under control leaves more room to stay profitable.

By reviewing your fixed costs regularly, you can identify ways to lower your business costs and improve your margin of safety, giving you a larger buffer before you hit your break-even point.

Take control of your fixed costs with Xero

Xero accounting software helps you track and manage your business costs in one place. With real-time reports and automated bank feeds, you can see exactly where your money goes and spot opportunities to reduce expenses. Ready to simplify your finances? Get one month free.

FAQs on fixed costs

Here are answers to common questions about fixed costs.

Is rent a fixed cost?

Yes, rent is a fixed cost. It stays the same each month regardless of how much you produce or sell, and only changes when your lease agreement is renewed or renegotiated.

Is salary a fixed or variable cost?

Salaries paid to permanent employees are usually fixed costs. However, commissions or bonuses tied to sales performance are variable or semi-variable costs because they change with output.

Is depreciation a fixed cost?

Yes, depreciation is a fixed cost. It does not change with production volume and is recorded as a non-cash expense that spreads the cost of an asset over its useful life.

Are fixed costs the same as sunk costs?

No, they're different. Sunk costs are expenses already spent that cannot be recovered, regardless of future decisions. Many fixed costs are ongoing and can be adjusted or eliminated over time.

Related terms

• Expense
• Cash flow
• Assets
• Profit and loss statement

Learn more about fixed costs

• Marginal cost
• Start up costs
• Managing finances and cash flow
• Small business accounting