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What Are Fixed Costs?

Electricity to run lighting and equipment is a fixed cost of production.
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  • Written By: Felicia Dye
  • Edited By: Heather Bailey
  • Last Modified Date: 19 April 2014
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In almost every case there are some expenses involved in running a business. These are known as operating costs. There are usually two groups of operating costs. One is variable costs, which are not constant. The other is fixed costs, which are expenses incurred on a regular basis, regardless of the volume of business.

A person can often determine whether or not an expense is fixed by considering how it is paid. If money must be made available to pay for an item on a regular basis, it is likely a fixed cost. For example, a printing business may take a 20-year lease on a copying machine. Payments may be required at the first of the month. This is a fixed cost.

It could be argued that this is not a fixed cost because it is only payable for a period of 20 years. However, one must realize that after the lease period, the lease will either need to be extended or another machine must be leased in its place for the business to function. For this reason, the machine’s lease is considered a fixed cost.

To clarify fixed costs, one can draw a contrast between them and variable costs. Maintenance of a copying machine, for example is a variable cost. If there is no business, the machine’s toner will not need to be replaced. Repairs will only be necessary when a part of the machine malfunctions or breaks. Since these items do not require regular expenditure, they are not fixed costs.

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Although fixed costs are characterized by regular payments, this does not mean that the prices are fixed. A fixed cost expense can fluctuate. The mortgage on a building can be considered a fixed expense. In some places, mortgages rates are affected by national interest rates. This means that if the interest rate rises, the price of peoples’ mortgages will rise.

Electricity is also generally regarded as a fixed cost. In most cases, an electric bill will vary from month to month. The amount of the bill is affected by the volume of business, but not to an extent that there is a possibility that months may pass without a bill. Even if the business is closed for a season or if it conducts no customer transactions for a period, there is still likely to be electricity flowing to that location and therefore a bill that needs to be paid.

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Discuss this Article

popcorn
Post 6

Even if you don't have a business knowing your fixed costs in regards to your household can really help make budgeting easier. I use a simple spreadsheet to keep track of my fixed expenses as well as solid estimates of my variable expenses so I don't end up short at the end of the month.

In regards to your home, things like the monthly cable bill, car payments and the mortgage are all fixed and don't offer any surprises from month to month.

If you are planning for something like a home renovation, knowing which costs will be fixed can really help you as well.

lonelygod
Post 5

If you are starting up your own small business getting a solid estimate of your fixed costs is a must. Even with the smallest home business you will have fixed costs, such as fees for your Internet service, the telephone line you are using and things as simple as the cost to keep your website hosted from month to month. I know I would have forgot about my regular insurance payments if I hadn’t made a list before I started.

I have found that if you search online there are great sites that can help you plan for the fixed costs that you will be paying and most sites will usually bring up things you may not have thought of before.

Babalaas
Post 4

How do I determine if a future cost will be a fixed cost or a variable cost? Should I try to add these costs into my fixed to calculate average fixed costs?

cougars
Post 3

@istria- You are right that the relationship between fixed and variable costs is dynamic, but renewable fuels area able to compete more with fossil fuels and nuclear without heavy subsidies or astronomical fuel prices. This will be especially true if congress decides to end oil and coal subsidies. To be honest, the only way that fossil fuel and nuclear compete with renewable energy is because of the subsidies those industries receive.

Realistically, the decommissioning of the power generating facility, whether renewable, fossil, or nuclear, should be included in the variable and fixed costs. Fossil fuel and nuclear utilities require hundreds of millions to billions of dollars for site remediation.

One must also account for the waste stream generated by fossil and nuclear energy utilities. These are often not included in the price of the generated electricity, but rather passed on to taxpayers to pay for waste repositories and Superfund cleanup. Studies have shown that the price per kWh would be more for fossil and nuclear utilities than nuclear utilities if these costs were properly accounted for.

istria
Post 2

@GlassAxe- Fixed and variable costs play an important role in power generation. These costs also represent a changing dynamic in energy production because they are so dependent on the type of fuel used to generate electricity as well as the technology used. Finally, efficiency must be taken into account when examining the fixed and variable costs of an energy project.

Fixed costs in electric utilities and energy producers can be separated into construction phase and operational phase costs. Fixed costs during the construction phase include the costs of materials, construction, turbines, boilers, real estate, and other costs. These are the costs that require capital and financing, eventually being passed on to the consumer in the price of electricity. Fixed costs during the operational phase include the costs of staffing engineers and technicians and maintaining the plant.

Variable costs are mostly the costs of fuel for the power plant, but often include marketing budgets. These costs change based on market supply and demand, and the prevailing political and legal climate. Traditionally, renewable energy projects have very high fixed costs because they use more land and metal resources, and the technology is not as mature as fossil energy. These projects cannot compete economically with fossil fuels unless the variable costs are high (oil, coal, and natural gas), or the project is heavily subsidized.

GlassAxe
Post 1

What is a fixed cost in electricity generation? I have heard that these costs can be a hindrance to certain types of power production, but I have also heard that these costs can are a benefit to power production. Why is there so much conflicting information on the costs of generating electricity? Can someone break down the types of costs in electricity production for me please?

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