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Fixed costs

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Definition of Fixed costs

Fixed Costs Image 1

Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.


fixed costs

costs that do not depend on the level of output.



Related Terms:

Semi-fixed costs

costs that are constant within a defined level of activity but that can increase or decrease when
activity reaches upper and lower levels.


fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. fixed operating costs provide capacity to carry on
operations and make sales. fixed manufacturing overhead costs provide
production capacity. fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.


break-even chart

a graph that depicts the relationships among revenues, variable costs, fixed costs, and profits (or losses)


breakeven point

The annual sales volume level at which total contribution
margin equals total annual fixed expenses. The breakeven point is only a
point of reference, not the goal of a business, of course. It is computed by
dividing total fixed expenses by unit margin. The breakeven point is
quite useful in analyzing profit behavior and operating leverage. Also, it
gives manager a good point of reference for setting sales goals and
understanding the consequences of incurring fixed costs for a period.



Breakeven point

The sales level at which a company, division, or product line makes a
profit of exactly zero, and is computed by dividing all fixed costs by the average
gross margin percentage.


Cash-flow break-even point

The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.


Fixed Costs Image 2

contribution margin

the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits


Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.


cost containment

the practice of minimizing, to the extent
possible, period-by-period increases in per-unit variable
and total fixed costs


operating leverage

the proportionate relationship between
a company’s variable and fixed costs


Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.


overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.


Agency costs

The incremental costs of having an agent make decisions for a principal.


Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.


capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.


Carring costs

costs that increase with increases in the level of investment in current assets.


carrying costs

costs of maintaining current assets, including opportunity cost of capital.



Costs Capitalized in Stealth

A particularly egregious form of aggressive cost capitalization
where inappropriately capitalized costs are hidden within other unrelated account balances.


costs of financial distress

costs arising from bankruptcy or distorted business decisions before bankruptcy.


Direct costs

costs that are readily traceable to particular products or services.


Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).


Fixed-annuities

Annuity contracts in which the insurance company or issuing financial institution pays a
fixed dollar amount of money per period.


Fixed asset

Long-lived property owned by a firm that is used by a firm in the production of its income.
Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents,
trademarks, and customer recognition.


Fixed asset

An item with a longevity greater than one year, and which exceeds a company’s
minimum capitalization limit. It is not purchased with the intent of immediate
resale, but rather for productive use within a company.


Fixed asset turnover ratio

The ratio of sales to fixed assets.


Fixed assets

Things that the business owns and are part of the business infrastructure – fixed assets may be
tangible or intangible.



fixed assets

An informal term that refers to the variety of long-term operating
resources used by a business in its operations—including real
estate, machinery, equipment, tools, vehicles, office furniture, computers,
and so on. In balance sheets, these assets are typically labeled property,
plant, and equipment. The term fixed assets captures the idea that the
assets are relatively fixed in place and are not held for sale in the normal
course of business. The cost of fixed assets, except land, is depreciated,
which means the cost is allocated over the estimated useful lives of the
assets.


Fixed Assets

Land, buildings, plant, equipment, and other assets acquired for carrying on the business of a company with a life exceeding one year. Normally expressed in financial accounts at cost, less accumulated depreciation.


Fixed Assets Turnover Ratio

A measure of the utilization of a company's fixed assets to
generate sales. It is calculated by dividing the sales for the period
by the book value of the net fixed assets.


Fixed-charge coverage ratio

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of
(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid
plus long-term lease payments).


Fixed Charge Coverage Ratio

A measure of how well a company is able to meet its fixed
charges (interest and lease payments) based on the cash
generated by its operations. It is calculated by dividing the
earnings before interest and taxes by the total interest charges
and lease payments incurred by the firm.


Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.


fixed cost

a cost that remains constant in total within a specified
range of activity


Fixed cost

A cost that does not vary in the short run, irrespective of changes in any
cost drivers. For example, the rent on a building will not change until the lease
runs out or is re-negotiated, irrespective of the level of business activity within
that building.


Fixed-dates

In the Euromarket the standard periods for which Euros are traded (1 month out to a year out) are
referred to as the fixed dates.


Fixed-dollar obligations

Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.


Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.


Fixed-exchange rate

A country's decision to tie the value of its currency to another country's currency, gold
(or another commodity), or a basket of currencies.


Fixed Exchange Rate

An exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market.


Fixed Expenses

Cost of doing business which does not change with the volume of business. Examples might be rent for business premises, insurance payments, heat and light.


Fixed-income equivalent

Also called a busted convertible, a convertible security that is trading like a straight
security because the optioned common stock is trading low.


Fixed-income instruments

Assets that pay a fixed-dollar amount, such as bonds and preferred stock.


Fixed-income market

The market for trading bonds and preferred stock.


Fixed-income security

A security that pays a specified cash flow over a
specific period. Bonds are typical fixed-income securities.


Fixed Interest Rate

A rate that does not fluctuate with general market conditions.


Fixed-location storage

An inventory storage technique under which permanent
locations are assigned to at least some inventory items.


Fixed overhead

That portion of total overhead costs which remains constant in size
irrespective of changes in activity within a certain range.


fixed overhead spending variance

the difference between the total actual fixed overhead and budgeted fixed overhead;
it is computed as part of the four-variance overhead analysis


fixed overhead volume variance

see volume variance


Fixed price basis

An offering of securities at a fixed price.


Fixed-price tender offer

A one-time offer to purchase a stated number of shares at a stated fixed price,
usually a premium to the current market price.


Fixed-rate loan

A loan on which the rate paid by the borrower is fixed for the life of the loan.


Fixed Rate Loan

Loan for a fixed period of time with a fixed interest rate for the life of the loan.


Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.


Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.


Funding Costs

The price of obtaining capital, either borrowed or equity, with intent to carry on business operations.


Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.


Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.


Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.


Intangible fixed assets

Non-physical assets, e.g. customer goodwill or intellectual property (patents and trademarks).


Longer-Term Fixed Assets

Assets having a useful life greater than one year but the duration of the 'long term' will vary with the context in which the term is applied.


Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.


Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.


Menu Costs

The costs to firms of changing their prices.


Period costs

The costs that relate to a period of time.


Policy Acquisition Costs

costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.


Political Costs

The costs of additional regulation, including higher taxes, borne by large and
high-profile firms.


Preopening Costs

A form of start-up cost incurred in preparing for the opening of a new store or facility.


Price impact costs

Related: market impact costs


Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.


Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.


Semi-variable costs

costs that have both fixed and variable components.


shortage costs

costs incurred from shortages in current assets.


Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a
routing.


Start-up Costs

costs related to such onetime activities as opening a new facility, introducing
a new product or service, commencing activities in a new territory, pursuing a new class of customer,
or initiating a new process in an existing or new facility.


Sunk costs

costs that have been incurred and cannot be reversed.


Sunk costs

costs that have been incurred in the past.


sunk costs

costs that have been incurred and cannot be recovered.


Tangible fixed assets

Physical assets that can be seen and touched, e.g. buildings, machinery, vehicles, computers etc.


Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.


Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.


Undepreciated Capital Costs

The tax definition of the value of an asset that is eligible for tax deprecation.


variable costs

costs that change as the level of output changes.


Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.


absorption costing

a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns


activity based costing (ABC)

A relatively new method advocated for the
allocation of indirect costs. The key idea is to classify indirect costs,
many of which are fixed in amount for a period of time, into separate
activities and to develop a measure for each activity called a cost driver.
The products or other functions in the business that benefit from the
activity are allocated shares of the total indirect cost for the period based
on their usage as measured by the cost driver.


Break-Even Analysis

An analytical technique for studying the relationships between fixed cost, variable cost, and profits. A breakeven chart graphically depicts the nature of breakeven analysis. The breakeven point represents the volume of sales at which total costs equal total revenues (that is, profits equal zero).


Capitalize

In Finance: to find the present value of a stream of cash flows.
In Accounting: to reflect costs of the balance sheet rather than charge them off through the income statement, as to capitalize major repairs to a fixed asset.


Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.


Contribution margin

The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed
costs.


cost structure

the relative composition of an organization’s
fixed and variable costs


Operating leverage

fixed operating costs, so-called because they accentuate variations in profits.


operating leverage

Degree to which costs are fixed.


Optimum selling price

The price at which profit is maximized, which takes into account the cost behaviour of fixed and variable costs and the relationship between price and demand for a product/service.


scattergraph

a graph that plots all known activity observations
and the associated costs; it is used to separate mixed
costs into their variable and fixed components and to examine
patterns reflected by the plotted observations


sunk cost

A cost that has been paid and cannot be undone or reversed.
Once the cost has been paid, it is irretrievable, like water over the dam
or spilled milk. Usually, the term refers to the recorded value of an asset
that has lost its value in the operating activities of a business. Examples
are the costs of products in inventory that cannot be sold and fixed
assets that are no longer usable. The book value of these assets should
be written off to expense. These costs should be disregarded in making
decisions about what to do with the assets (except that the income tax
effects of disposing of the assets should be taken into account).


Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.



 

 

 

 

 

 

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