Fixed Cost

Fixed Cost Definition

A fixed cost is a business expense that stays the same regardless of how much you produce or sell. Rent, insurance premiums, and salaried employee wages are classic examples. Whether your revenue doubles or drops to zero, fixed costs remain constant over a given period.

Fixed Cost in Practice — Example

A yoga studio pays $3,500 per month in rent, $400 for insurance, and $2,000 for a salaried front-desk manager. Whether 10 students or 100 students show up this month, those costs total $5,900 either way. The studio's variable costs—like towel laundry and credit card processing fees—fluctuate with attendance, but the fixed costs don't budge.

Why Fixed Cost Matters for Your Books

Understanding fixed costs is essential for break-even analysis and pricing decisions. If your fixed costs are $5,900 per month and your average class generates $20 in profit after variable costs, you need at least 295 class attendees per month just to break even. That math is impossible without knowing your fixed costs.

Fixed costs also affect cash flow planning. Even in a slow month, those bills come due. Businesses with high fixed costs need a bigger cash cushion to survive downturns. Conversely, once you cover your fixed costs, additional revenue is highly profitable because you're only paying variable costs.

For bookkeeping, categorizing expenses as fixed vs. variable helps you build more accurate budgets and forecasts. If you know $5,900 is locked in every month, you can project annual costs with confidence and focus your attention on managing the variable side.

How Fixed Cost Shows Up in QuickBooks

In QBO, fixed costs show up as recurring expenses in accounts like Rent, Insurance, and Salaries. Set up Recurring Transactions (gear icon → Recurring Transactions) for predictable fixed costs so they're automatically recorded each month. On the Profit & Loss, fixed costs appear in their respective expense categories. To separate fixed from variable costs, use classes or custom tags—QBO doesn't distinguish between them natively.

Common Mistakes

Assuming all costs are fixed: Some costs look fixed but have variable components. A phone bill with a base rate plus overage charges is semi-variable.

Not planning for fixed cost increases: Rent escalations, insurance renewals, and salary raises mean fixed costs creep up annually. Budget for increases.

Ignoring fixed costs in pricing: If you only price based on material/variable costs, you'll never cover overhead. Fixed costs must be factored into your pricing model.

FAQ

Q: Can a fixed cost ever change?

A: Yes—fixed costs can change between periods (like an annual rent increase), but they don't change based on production volume within a period. That's the distinction from variable costs.

Q: Is payroll a fixed cost?

A: Salaried employees are a fixed cost. Hourly employees whose hours vary with demand are a variable cost. Most businesses have both.

Related Terms

Variable Cost

Break-Even Point

Operating Expense

Overhead

Gross Margin

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