What are fixed costs?

Fixed costs are expenses that remain constant regardless of the level of production or sales volume. This characteristic distinguishes them from variable costs, which fluctuate based on the business activity level.

For example, rent, salaries, and insurance are typical fixed costs that a business incurs even if it does not produce or sell anything during a particular period. Understanding fixed costs is crucial for businesses because they must be covered regardless of performance; thus, they significantly affect profitability and financial planning.

Recognizing fixed costs helps in budgeting, forecasting, and strategic decision-making since these costs remain stable as operations scale up or down. This knowledge allows firms to analyze their break-even points and set pricing strategies effectively.