What Are Fixed Costs
Fixed cost is an inevitable part of any business. The fixed costs make a part of the total costs of a business. The other part of the total cost is variable cost. It is very important to know the difference between the two types of costs. This article will explain what the fixed cost is.
Variable costs are the normal day-to-day costs involved in the business. This will change as and when the level of activity in the business changes. For example, if the business is making 100 jeans pants a month and wants to increase its production to 150 jeans pants, it will have to buy more raw materials. This increases the costs of the firm.
On the other hand, fixed costs are the costs, which will not change irrespective of the amount of output that the business gives. The various types of fixed costs are the machinery and other capital materials which the business purchases. Taking the same example, the business will not require extra fixed cost to make the jeans pants. This is because the business will not need more machines to make the extra jeans pants. The same machinery can be used extensively to make them. In other words, the amount spend on purchasing a fixed asset is known as fixed cost. This is a part of the balance sheet on the asset side.
In a diagrammatical representation of the total cost of the business, the fixed cost will remain the same throughout while the variable cost will fluctuate accordingly. The fixed cost for all the units is the same. There are various types of fixed costs, which the company will spend on.
- Machinery- this is the basis on which, the company runs and functions. The business can manufacture only with the use of machines. Thus, this is the first fixed cost that the company incurs.
- Vehicles- this is the main means of transporting the raw materials and finished goods. This is another fixed cost, which will stay for more than a year in the business.
When you buy an item falling under fixed costs, you should know that they have a particular shelf life. At some point of time, the fixed asset is going to stop functioning. For this purpose, one has to deduct depreciation from the actual value of the machinery and make place for the new machinery when the time arrives. This depreciation applies to all the fixed assets like the cars, machinery and any other assets, which is of use for more than a year in the business.