Fixed costs do not change with production or sales levels. They remain constant for a specific period of time and are typically stated as a flat amount. Some costs consist of both variable and fixed components. Businesses do this in order to calculate their break-even points and profits.
Fixed costs do not change with production or sales levels. They remain constant for a specific period of time and are typically stated as a flat amount. Some costs consist of both variable and fixed components. Businesses separate total fixed costs from variable costs in order to calculate their break-even points and profits. Examples of fixed costs include rent and an employee's salary or base pay.
Total fixed cost is found by identifying a company's costs and adding all the fixed costs together, or by subtracting the company's total cost from its total variable costs.
Determine Fixed Costs
Identify the costs incurred by the business that do not change regardless of the number of units produced or sold. Look for costs that remain flat even when zero units are produced. Determine what portion of any mixed costs do not change with production or sales levels and separate the fixed cost from the variable portion. For example, the compensation for sales representatives may include a base amount in addition to a commission percentage.
Separate the flat base amount as a fixed cost since the representatives will be paid their salary even if they do not obtain any sales. Look for language that describes a cost as per month or per year to correctly identify it as fixed.
Label Each Category of Fixed Costs
Group all of the identified fixed costs together. Make sure that each cost is identified and labeled separately. For example, label the amount of building rent as "rent per month" next to its actual fixed cost. Repeat this labeling for each category of fixed cost that the business incurs for the time period that the costs are being calculated for.
Ensure that Costs Correspond to the Time Frame
Ensure that each cost category corresponds to the same time frame. For instance, if you have an annual figure for rent and a monthly figure for the rest of your categories, you will need to divide the annual rent figure by 12. Add all of the fixed cost amounts to arrive at the company's total fixed cost.
Calculate Total Fixed Cost
Determine the total fixed cost when variable costs and total costs are known by simply subtracting the variable costs from the company's total costs. For instance, you may be given data where only unit variable costs are provided along with the number of units to be sold at a certain price in addition to the company's total production costs. Calculate the total variable costs and substitute it into the equation total costs (TC) equals fixed costs (FC) plus variable costs (VC). Subtract the total production costs from the variable costs to arrive at total fixed cost.
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