What Is a Fixed Cost?
Definition, examples, and why the cost per unit falls as output rises.
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| Opposite of | Variable cost |
|---|---|
| Per-unit behaviour | Falls as output rises |
| Topic | Cost accounting · Cost behaviour |
Fixed cost in plain English
A fixed cost does not care how busy you are. A shop pays the same rent whether it sells 100 items or 1,000. Fixed does not mean forever. It means fixed within a normal range of activity. A much bigger factory may need new premises, and the fixed cost steps up.
Worked example
Monthly rent is 2,000.
| Units produced | Total fixed cost | Fixed cost per unit |
|---|---|---|
| 100 | 2,000 | 20 |
| 1,000 | 2,000 | 2 |
The total stays at 2,000, but the cost spread over each unit drops from 20 to 2.
- Thinking fixed cost per unit is constant. It is the total that is fixed.
- Assuming a cost is fixed over any volume. Step costs jump when capacity is exceeded.
Frequently asked questions
What is the difference between fixed and variable costs?
Fixed costs stay the same in total as activity changes. Variable costs rise and fall in proportion to activity.
What are examples of fixed costs?
Rent, insurance, salaries of permanent staff, loan interest and depreciation on a straight-line basis.
What is a semi-variable cost?
A cost with both fixed and variable parts, such as a phone bill with a line rental plus charges per call.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.