Typical or Average Fixed Costs

So what are typical or average fixed costs?

On one of the previous pages you were advised to classify all of your small business operating expenses as variable or fixed. Before you do that take a look at examples of typical or average fixed costs.

A Definition

Fixed costs are costs that do not vary in total during a period even though the volume of goods manufactured or sold may be higher or lower than anticipated.

Examples of Fixed Costs

For a manufacturing business the fixed costs would include things like:

• Factory rent,
• Administrative salaries,
• Machine hire or lease costs,
• Utilities for the factory and offices, and
• Depreciation on assets.

The fixed costs for a retail business might include things like:

• The cost or leasing a shop-front,
• Utilities,
• Staff salaries, and
• Utilities or center management costs.

Why are Fixed Costs Important?

Fixed costs are costs that you will have to pay whether you are producing goods for sale or not and cannot generally traced directly back to units of product.

When you are calculating your unit cost for your product a proportion of your fixed costs will be attributed to each unit. That proportion will vary depending on the activity level of your business.

As an example let us assume that your fixed costs are $100,000 per year.

If your activity level is 100,000, $1.00 of fixed will be attributed to each unit of product. However, if you activity level is 50,000, $2.00 of fixed cost will be attributed to each unit of product.

If your variable cost for each unit is high, the change in the allocation of fixed costs might not make a significant difference to your costing and pricing decisions, but what if the variable cost per unit is $0.50? By reducing the activity from 100,000 to 50,000, you have decreased your total costs by $25,000 (50,000 x $0.50) but the unit cost for each unit of product has increased by 66.67%.

If you are operating in a highly competitive market or your customers are price sensitive, you just might have a problem.

Information to collect about your Fixed Costs

When you have identified which of your operating costs are fixed costs, you should take note of the annual cost of each item. If you would find a template helpful click on this link to a template that you can download or print.

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