What is fixed cost?
Fixed costs represent a particular category of expenses or costs that remain constant, regardless of whether the volume of goods or services sold increases or decreases. These costs are typically linked to time, such as monthly interest payments or rent, and are commonly known as overhead expenses. Their role in bolstering per-unit profitability becomes evident as a business ramps up its production.
In duo with variable costs, fixed costs constitute the twin pillars of the total cost for a business's offerings, be it goods or services. These are the financial outlays that stay unaltered as the production level experiences shifts. On the contrary, variable costs respond to production variations, illustrating their correlation with output levels. This duality of fixed and variable costs directs the intricate arrangement of a business's cost structure.
Understanding Fixed Cost
Imagine a scenario where you're running a small bakery. In this bakery, some expenses remain constant each month, regardless of how many pastries or cakes you bake. These unchanging costs include things like your monthly rent, the fees for the bakery's phone and security systems, and other similar expenses. On the flip side, the wages you pay to your bakers might vary based on how much you bake – more baked goods could mean more hands on deck.
Now, let's talk about how you can use a simple formula to keep track of these expenses in your bakery's bookkeeping. It's useful to understand how your overall costs are split between those fixed expenses and the ones that shift with production. This division is pretty crucial. Plus, when you're thinking about future plans, like new marketing strategies or expanding your menu, knowing how changes in sales that could impact your earnings becomes really handy. And there's something called discretionary fixed costs. These are basically costs that pop up when you decide to invest in certain fixed items for your bakery. Think of it as the money you choose to spend on things like advertising your delicious treats, maintaining your baking equipment, or even putting resources into new recipe development. These decisions you make can influence your bakery's financial picture in interesting ways