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Operating costs are expenses involved in running a business, which can be divided into fixed costs and variable costs. Fixed costs are regular expenses, such as lease payments, while variable costs fluctuate. Fixed costs can still fluctuate in price, such as with mortgage rates, but they are regular expenses. Electricity is also generally considered a fixed cost.
In almost all cases there are some expenses involved in running a business. These are known as operating costs. There are generally two groups of operating costs. One is variable costs, which are not constant. The other is fixed costs, which are expenses incurred on a regular basis, regardless of business volume.
A person can often determine whether or not an expense is fixed by considering how it is paid for. If money must be available to pay for an item on a regular basis, it is likely a fixed cost. For example, a printing company may take a 20-year lease on a copier. Payments may be required at the beginning of the month. This is a fixed cost.
It could be argued that this is not a fixed cost because it is only paid over a period of 20 years. However, one must realize that after the lease period, the lease will have to be extended or another machine must be leased in its place in order for the business to function. For this reason, the lease of the machine is considered a fixed cost.
To clarify fixed costs, a contrast can be made between them and variable costs. The maintenance of a copier, for example, is a variable cost. If there is no business, it will not be necessary to replace the toner in the machine. Repairs will only be necessary when a part of the machine malfunctions or breaks. Since these items do not require regular expenses, they are not fixed costs.
Although fixed costs are characterized by regular payments, this does not mean that prices are fixed. A fixed cost expense can fluctuate. A building mortgage can be considered a fixed expense. In some places, mortgage rates are affected by national interest rates. This means that if the interest rate increases, the price of people’s mortgages will increase.
Electricity is also generally considered a fixed cost. In most cases, an electric bill will vary from month to month. The amount of the invoice is affected by the volume of business, but not to the extent that there is the possibility of months going by without an invoice. Even if the business is closed for a season or does not transact with customers for a period, there is likely electricity flowing to that location and therefore a bill that needs to be paid.
Smart Assets.
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