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Fixed overhead costs are specific business expenses that do not change monthly, such as rent and salaries. They are predictable and do not fluctuate with sales volume.
A fixed overhead refers to a specific type or group of business expenses. The word business overhead is used to describe the cost of doing business or the amount of money an individual or company must spend to run and maintain a functional business. Fixed means that the specific cost does not change monthly.
Certain costs in business are variable or may change daily, monthly or quarterly. For example, the cost of inventory can change depending on how many products a person needs. The cost of labor can also change if, for example, a company needs to pay someone to work extra hours when sales volume increases.
A fixed cost, on the other hand, does not change or fluctuate with sales volume. A fixed fixed cost stays the same whether a company sells one of an item or 1,000 of an item. Fixed overhead costs are therefore predictable and generally remain the same for at least a defined period of time, usually a year.
There are several different types of fixed overhead costs that are common in business. Rent, for example, is usually a fixed fixed cost. Most businesses will sign a lease for at least one year on office space or retail space. The rent stays the same for that period of time and doesn’t increase any further just because the business sells more or less of a product or service.
Certain other office expenses can also be fixed expenses. Salary cost paid to managers can also be considered a fixed overhead cost, unless managers are paid with a bonus or commission structure tied to sales. Interest on borrowed money, depreciation or reduced value of building or equipment, and other costs are also considered fixed since they do not vary from month to month.
Fixed overhead costs don’t necessarily stay put forever. They can change if a landlord raises the rent or if a new manager is hired, for example. The change, however, will not come from an increase or decrease in sales, and as a result, the cost will still be considered a fixed cost.
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