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.
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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.
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.