Fixed costs

The costs of a business that do not depend on how many products or services are sold in the short term are fixed costs.

Every business has fixed (permanent) and variable costs. Fixed costs are those that do not directly depend on the amount of goods or services the business sells. A typical fixed cost is, for example, the cost of labour cost, the cost of a store or other real estate or, in general, the overhead type costs.

However, it is also understandable that these expenses may also change. After a while, for example, as the traffic increases, it may be necessary to hire new employees, and as it decreases, it may also be necessary to fire the existing ones - in the long run, almost all cost change. 

There are goods that are fixed costs for one company, while it is appropriate to see them as variable costs for another. In the majority of companies, electricity is a constant cost, and it changes roughly the same every month, since the consumption of office lighting, printers and refrigerators does not change significantly in connection with work. However, in the case of a bakery, the electricity bill is part of the variable costs, since most of the electricity there is used to heat the ovens, and that largely depends on how much bread needs to be baked. 

It is important that when our business your financial plan separate fixed and variable costs. We have to treat the two cost categories in a completely different way when we are looking for the answer to how many products we need to sell in order to profitable be the activity. The products and services sold must always, in every case, produce the fixed costs as well, since if the income only collateral the variable costs directly related to the product, then the operation would be unprofitable. 

The fixed cost per product indicator number it is called specific fixed cost and is calculated by dividing all fixed costs by the number of products sold. The more products or services we can sell at the same fixed cost level, the lower the fixed cost element in the price of the product. This also means that if we sell more and more at the same price, the profit-generating capacity of our product improves, i.e. our activity improves economies of scale.