Fixed cost

accounting

The fixed cost is one that is independent of the production activity of a company; that is to say, it represents an invariable expense —at least, during a certain period— in relation to the quantity of goods or services obtained during a determined period of time.

In other words, the fixed cost is an accounting item of any organization that is not affected by its turnover. Take as an example the rental price of the premises where the company is located or the salary charged by its CEO.

Fixed cost characteristics

For a better understanding of the concept, the main characteristics that the fixed cost encompasses should be highlighted:

1. It is an expense that can be controlled and anticipated.

2. It is linked to the entity's production capacity although, if for a specific reason, the latter is altered, the fixed cost continues with its level of stability.

3. It is usually managed based on the decisions of the organization's administrative leadership.

4. It depends on the time factor since any business resource can vary in its daily development; therefore, and following the same example, the general director of the company may see his payroll reduced or increased in the short term, which will affect the total calculation of fixed costs.

Fixed cost types

In parallel, the fixed cost can be classified into two basic categories that we detail below:

1. Committed fixed cost: It corresponds to the expense that arises out of necessity and that cannot be modified without adversely affecting the company's production. In this section you will find, where appropriate, the expenses involved in financing the office's IT infrastructure or the remuneration of the staff.

2. Discretionary fixed cost: It is related to the planned projections on maintenance, repair, advertising, marketing expenses… in short, with the capital that allows the development and execution of the corporate activity.

By way of conclusion, it can be said that the fixed cost is an amount of money that the company must assume regardless of the income it obtains with its level of production; Thus, the organization must determine an optimal accounting management plan in which the total result of the fixed costs allows it to face any type of economic unforeseen -which can always happen- and continue with its business trajectory.

Fixed and variable costs Total cost

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