What are fixed costs?

Economically speaking, fixed costs are those expenses of the business activity that do not depend on the level of production. The administration usually refers to them with the term "general expenses”.

They are not fixed permanently, as they tend to change over time, but this change will not depend on the quantity produced for the period in question. Therefore, these make up those costs that the company must pay regardless of its level of operation, that is, whether or not it produces these payments.

Conceptually, a fixed cost, It is an expenditure in which the company incurs obligatorily, even when it operates at mid-gear, or in the worst case, it does not operate for some force majeure reason. For this reason, they constitute a serious problem for companies, especially when for some reason, their productivity and income decrease.

Businesses should do everything possible to cut fixed costs, as this will allow them to adapt to operational ups and downs. When these costs are high, in a period of low productivity for the company, it can present losses, a situation that would be avoided if fixed costs could be reduced to the extent that the production.

It would be convenient for any company if its costs were based on the income produced, that is, they only had costs variables, something that is impossible, although it is possible to work with a minimum of fixed costs, and that should be the objective of good management of costs.

Types of Fixed Costs:

• Committed fixed costs: These are costs that are generated from the decision to acquire better productive capacity by investing in a production plant, the machinery and other tools used. Payments for these fixed assets they are done irregularly as their benefit is supposed to span a relatively long period of time. For example: depreciation, amortization.
• Fixed operating costs: These are the costs that are required to be maintained in order to operate the fixed assets. Despite being a fixed cost, which is incurred monthly, the cost differs from month to month. For example: Electricity, salaries, leasing of offices or premises, property taxes, utility service telephone and internet, office expenses, drinking water service, administrative and sales expenses, obligations financial
• Fixed programmed costs: These are the costs of special programs admitted by management, they have no direct relationship with the facilities or operations. For example: advertising, quality improvements, implementation of a new product.
• Semi-fixed costs: They are those that are partially composed of fixed costs and variable costs, they have a varied behavior pattern An example of this is maintenance and repair costs, maintenance is fixed and repair increases according to the level of activity.

The distinction between types of costs, it will not always depend on the characteristics and nature of the cost, since the decisions made by the administration and senior management considerably affect this distinction, so much so that the company seeks and manages costs in order to reduce fixed costs more and more and thus achieve a balance that guarantees the profitability of the company.