Fixed costs are costs that do not change when sales or production volumes increase or decrease. This is because they are not directly associated with manufacturing a product or delivering a service. As a result, fixed costs are considered to be indirect costs.
Fixed costs can include property taxes, rent, salaries and the cost of benefits for non-sales and management personnel. They are one of three types of costs incurred by most businesses. The others are variable and semi-variable costs.
Usually, fixed and semi-variable costs appear together on a company’s income statement as indirect costs.
It is important for business owners to understand the costs they incur so they can manage their expenses effectively. As a general rule, higher sales and production volumes lead to higher total costs, but because some costs are fixed, the percentage increase in total costs will be less than the percentage increase in sales and production.
More about fixed costs
The income statement below shows how fixed costs appear on a manufacturing company's income statement and factor into earnings before interest and taxes.