The fixed cost of a project or business that cannot be changed. Knowing your fixed costs is essential for proper accounting, as it helps you see what costs you must pay each month, and have no chance of cutting to make your business more profitable. In general, fixed costs are imagined in smaller scales (6 months to a year), as all costs can change at some point. However, you should still know your fixed costs for any given year. [1] X Research source
Note : Fixed costs are often called "indirect costs" or "overhead" as well.
Steps
Method 1
Method 1 of 2:
Finding Your Fixed Costs
-
Make a list of all costs over a period of time. Commonly you use quarters (3-month periods) or years to see your expenses running a business. If you don't already have detailed receipts and books, start making them immediately. Save all receipts and, at least once a week, write down all of the costs that you spend in a ledger, or accounting book. You want to note everything about the expense, including:
- Amount
- Date spent
- Reason for spending
- If it is recurring (will you need to pay the same costs again?)
-
Separate your fixed costs from your marginal, or variable, costs. Fixed costs don't change no matter how much you produce. If you own a factory that makes postcards, you will pay the same amount of fixed costs if you produce 100 vs. 100,000 postcards. Variable costs change depending on how much you're spending each day. [2] X Research source For example, in the postcard factory you might break down costs as:
- Fixed Costs: Things that repeat every month, such as rent/mortgage for the factory, insurance, taxes, equipment maintenance, and payments.
- Variable Costs: Bills that aren't the same amount every month, such as the water bill. Supplies and other variable costs might include things such as paper, ink, shipping to customers, etc.
Advertisement -
Look out for commonly overlooked fixed costs. Use your records to look for certain costs that you pay regularly each month or year. Fixed costs are essential to run your business, and may raise or lower if your business gets bigger or smaller. However, fixed costs will not change depending on how much of your product you make or sell. Some costs can be both fixed and variable. For example:
- Labor: You may need to hire more workers depending on how many card you make. However, your support staff of administrative assistants, accountants, etc. will stay fixed unless you become much bigger of a company.
- Permits, Taxes, etc: You may need to pay more taxes and file for different permits depending on your business, but you will always need to pay the basic permits and taxes on your equipment, building, etc.
- Maintenance and Upkeep: You may go 6 months without having to fix anything, then suddenly need to fix the whole system. It may feel variable, but repair costs and upkeep are inevitable in every business. Take a look at old financial records, or average your repair costs over 12 months, and you'll notice that general upkeep is a fixed cost.
-
Divide fixed cost by total units produced. This is a simple, but important metric to help you set prices and find ways to improve your business. For example, you might have a fixed cost of $100 for your small postcard company over 1 month. Say you produce 200 cards in that month. This would mean that, for each card you make, it costs you $0.50 in fixed cost. The more cards you make, the lower this gets, leading to higher profits. [3] X Research source
- This is known as "Fixed Cost per Unit."
-
Recognize that greater production lowers your fixed cost per unit. Fixed costs are inevitable, and the only way to eliminate them is to get out of business. You likely cannot lower them directly, but you can lower their impact by making and selling more. This is why mass-production is considered cheaper than making small individual products. [4] X Research source Returning to the postcards:
- Imagine that your total fixed cost is $500,000. It costs your $0.50 in paper, ink, and labor to make each card.
- If you make 500,000 cards, then each card will cost you $1 in fixed costs to make. With variable costs (ink, paper, etc.) each card costs you $1.50 to make total.
- If you sell the cards for $2.50 a piece, you'd be making $1 profit on each card.
- However, if you make and sell 1,000,000 cards, suddenly you're only spending $0.50 per card in fixed cost, bringing your total cost to $1. You're now making $1.50 in profit on each card, without having to change prices or demand for your cards.
- Note that, in reality, this is not so simple. Drastically increasing production may increase fixed costs, though variable costs may go down as well. However, the principle of distributing fixed costs with mass-production still holds.
Advertisement
Method 2
Method 2 of 2:
Projecting Fixed Costs into the Future
-
Adjust your fixed cost estimates for depreciation, interest, and taxes to determine the health of your business. The aforementioned calculations, though simple, are easy tools to see how your costs are distributed and find ways to save money. However, you'll need to use the following equation to get your actual fixed costs over time:
Fixed Cost = Cost + Depreciation + Interest on Investment + Insurance and Taxes This helps you see how much you'll be paying into the future on your big fixed costs, like a mortgage or piece of equipment. While it seems complicated, all this really does is tell you how much your equipment would be worth if you quit the business and tried to sell it. [5] X Research source- For this section, assume you're looking 10 years into the future. You can, however, set any length of time you'd like.
-
Input the total cost of the item for "Cost. " This is where you input the normal fixed cost. For example, say you bought a postcard printing press worth $10,000. This is the Cost. However, imagine that you are paying for it with a loan, only paying $2,000 a year. You would still put down $10,000 for Cost.
- Don't forget to add maintenance and upkeep costs on the press. For simplicity sake, assume here that it is only $100 a year. That means, after 10 years, you pay $1,000 in repairs (10 x $100).
- TFC over 10 Years on Printing Press = $11,000 + Depreciation + Interest on Investment + Insurance and Tax
-
Find depreciation by estimating what your equipment would be worth when you sell it. Ten years from now, you may want to dump the printing press for a new one. Even if you didn't, you need to account for the amount of money you'd sell it for as a cost. [6] X Research source This seems weird, at first, but think of it as "spending the money to keep the press." For example, say most Printing Presses are worth $500 after 10 years. By not selling it until then, you're giving up that $9,500 that you could have made by selling it. Thus:
- TFC over 10 Years on Printing Press = $11,000 + $9,500 + Interest on Investment + Insurance and Tax.
-
Factor in any interest payments made to determine what you actually bought the machine for. You might have bought the printing press on loan, meaning you're paying interest on it each time you pay. For simplicity's sake, assume that your interest rate is only 1% a year. After 10 years, you accrue an extra $1,000 of interest. Add it into your cost.
- TFC over 10 Years on Printing Press = $11,000 + $9,500 + $1,000 + Insurance and Tax.
-
Add in the extra payments you must make on the machinery, including insurance and taxes. You may need to pay $500 a year on your new investment to the IRS, plus an extra $10 a month to keep it ensured ($120 a year). Other costs could be thrown in as well, like an annual safety inspection that you must get for the machine costing $100. This is where you accrue the final costs that you must pay on your printing press over 10 years. So:
- TFC over 10 Years on Printing Press = $11,000 + $9,500 + $1,000 + $720.
-
Add up these costs to get your Total Fixed Cost, the amount of money your machine will cost you over 10 years if you didn't sell it. This is a great way to see the effects of long-term investments. Instead of just seeing your day to day costs, you can plan your long-term strategy around this cost, adjusting the price of your product accordingly.
- TFC over 10 Years on Printing Press = $11,000 + $9,500 + $1,000 + $720 = $22,220
Advertisement
Community Q&A
Search
-
QuestionHow do I calculate fixed costs given gross sales, variable cost, and profit?Community AnswerIf profit = gross sales - (fixed costs + variable costs), then gross sales - (variable costs + profit) = fixed costs
Ask a Question
200 characters left
Include your email address to get a message when this question is answered.
Submit
Advertisement
Tips
- Overestimating, if only slightly, is generally the safest practice when you need to guess at a future cost. This lets you plan for higher expenses, which may save you money in the long-termThanks
- If you cannot get your fixed costs (ie. your business is too new), go online and look up costs for similar business.Thanks
Advertisement
Warnings
- Fixed costs can change depending on the market around them. A landlord, for example, can unexpectedly raise the rent. Understand that these numbers are estimates and constant, but might be variable as well.Thanks
Advertisement
References
- ↑ https://www.accountingtools.com/articles/what-are-examples-of-fixed-costs.html
- ↑ https://www.accountingtools.com/articles/what-are-examples-of-variable-costs.html
- ↑ https://blog.hubspot.com/marketing/fixed-cost
- ↑ https://corporatefinanceinstitute.com/resources/knowledge/economics/economies-of-scale/
- ↑ https://www.accountingtools.com/articles/total-fixed-cost-formula.html
- ↑ https://www.patriotsoftware.com/accounting/training/blog/how-to-calculate-depreciation-expense/
About this article
Article Summary
X
To calculate fixed cost, start by making a list of all your business costs over a fixed period of time. In your list, include things like staff salaries, taxes, and permits. Then, separate your list into costs that change over time, called variable costs, and those that stay the same, or fixed costs. Next, add up the fixed costs. Finally, divide it by the number of individual products you produced in that same time frame to get the fixed cost per unit. For tips on how to project fixed costs into the future, read on!
Did this summary help you?
Thanks to all authors for creating a page that has been read 186,124 times.
Reader Success Stories
- "All about calculation in an entrepreneurship."
Advertisement
