Fixed expenses are those that have no relation to the cost of the product (be it production or purchase of goods). In other words, regardless of monthly sales or production costs, expenses classified as fixed will remain the same.
Types of Fixed Expenses include rent, bank fees, insurance and others. As you can see, they are expenses incurred even if the company does not sell anything in a month or is at a loss. This makes sense, since the rent value, for example, does not depend on what the organization produced in the month.
Now that we know what Fixed Expense is, it is important to differentiate something that many first-time sailors confuse, the concept of Fixed Expenses with “Uniform Expenses” (this term does not exist, we just invented it, but without problems, what matters is what we’re trying to tell you here).
Fixed Expense is an expense that will happen every month, rain, shine, your company operates or not. But that does not mean that it will be the same every month. For example, water is a Fixed Expense, but your company does not pay the same amount every month.
To better understand your concept then let’s see some examples of more common fixed expenses :
Real estate rental or financing ; Electricity; Telephone and internet; Water; Tuition; Sports academy; Health insurance; As we can see, fixed expenses are linked to the most basic needs of members of a family. And in this way, accounts are difficult to set aside.
umming up the difference between fixed expenses, (costs) and variable expenses
To make it easier to understand the differences and ratio of Fixed and Variable Expenses, let’s think about the following:
- The Fixed expenses do not have to do with the cost of the product (either the production or purchase of goods);
- The expenses variables are on the way, as have an indirect relation to the cost of the product (either the production or purchase of goods). This is where we would use a method like Absorption Costing , for example, to account for these disbursements;
- Since the costs have a direct relation to the cost of the product (either the production or purchase of goods). This is where we would use a method like Direct Costing , for example, to account for these disbursements.