What are fixed costs?

Fixed costs are defined as expenses that do not fluctuate with the level of production or sales within a certain range of activity. This means that regardless of how much a company produces or sells, these costs remain constant. Common examples of fixed costs include rent, salaries, and insurance—expenses that must be paid irrespective of the company's output levels.

In contrast, costs that vary directly with production volume, such as materials and labor associated with creating products, would be classified differently. Likewise, costs that adjust based on market prices are also variable and can change, making them distinct from fixed costs. The notion that fixed costs are solely incurred at the end of a fiscal year is misleading, as these costs are typically ongoing expenses incurred throughout the year, not just at a specific time. Understanding the nature of fixed costs is crucial for financial planning and analysis, particularly for budgeting and forecasting within a business context.