What are fixed costs?

Fixed costs refer to expenses that remain constant regardless of the level of production or business activity. These costs are essential for the operation of a business and do not fluctuate based on the volume of goods produced or services rendered. Common examples of fixed costs include rent, salaries, and certain utilities, which must be paid even if the production levels decrease or halt completely.

Understanding fixed costs is crucial for budgeting and financial planning, as they influence the break-even point and overall profitability of a business. Unlike variable costs, which are directly tied to production volume and can change based on business activity, fixed costs provide stability in projecting expenses over time. This characteristic allows businesses to predict their financial obligations more accurately, regardless of market conditions.