Companies pay attention to fixed expenditures and variable costs to monitor money going out of operating coffers and to determine where to cut expenses and run efficient activities. These initiatives help department heads prevent significant operating losses, the kind that could cause investor exodus and wreak havoc on a company's operations.
A fixed expenditure is a cost that doesn't fluctuate -- or does so relatively slowly -- compared to other expenses a company has during the month. Fixed expenditures run the gamut from depreciation and interest to salaries, rent and advertising. Depreciation relates to the periodic reduction in the worth of a fixed asset, the kind of resources a business relies on to make money over several years.
In the corporate context, the notion of fixed expenditures often introduces the separate, related concept of semi-fixed costs. Also known as a semi-variable expense, a semi-fixed cost remains more or less unchanged if a company's output level remains within prescribed operating limits, but it goes up as soon as production numbers escalate. For example, factory utilities expenses, including electricity and cooling water for production machinery, typically increase when a company increases its manufacturing levels.
Product Cost vs. Fixed Expenditure
Money that a company spends to manufacture a product include labor and materials, which are the two primary expenses integral to product costing. For analytical convenience, cost accountants set product expenses apart from fixed expenditures, most of which are part of the "selling, general and administrative costs" section of an income statement. SG&A costs include salaries, office supplies, litigation, machinery maintenance and more. Top leadership relies on the expertise of manufacturing supervisors and product managers to figure out fixed cost trends, eliminate waste, make money and come up with sound ways to cut costs.
For a company's management, analyzing fixed expenses periodically is a money saver because it helps the business determine the minimum amount of income it must reap to break even. In a financial glossary, a break-even point is the performance number at which a business will make or lose money. By heeding fixed expense levels, department heads can identify areas to improve or reduce costs, fix internal problems, find ways to attract customers and introduce technology in internal processes to speed up task execution. The ultimate goal is to ensure fixed expenditures don't fester into a grim money-losing scenario.