Fixed costs and variable costs are the two major inputs used by a company's management team to determine budgets and control expenses in relation to revenues. Unlike variable costs, which change based on how much a company produces, fixed costs remain the same regardless of business output. Calculating and tracking fixed costs is 💯essential to accurate cost accounting.

Cost Accounting

澳洲幸运5官方开奖结果体彩网:Cost accounting is a business tool used by management to evaluate ꧅production costs, prepare budgets, and take appropriate cost control measures to improve the company's profit margins.

The purpose of cost accounting is to determine a company's production costs by examining direct and indirect costs involved in manufacturing the company's products.

Fixed Costs

Fixed costs are one element examined in the process of cost accounting. Fixed costs are independent of changes in production output or revenues. These c😼osts remain relatively the same regardless of whether a company manufactures 10 widgets or 10,000 widgets in a given month.

Fixed costs are associated with the basic operating and 澳洲幸运5官方开奖结果体彩网:overhead costs of a business. They include items such as 🦹building rent, utilities, wages, and insurance. Most forms of depreciation and tangible assets qualify as fixed costs as well.

Fixed costs are considered indirect costs of production. They are not costs incurred directly by the production process, such as parts needed for assembly, but they nonetheless factor into total production costs. To produce a product or service, the ♐business has to be functioning and operational, and fixed costs represent those necessary operating costs.

"Fixed" in this context does not mean completely unchangeable, only that the costs do not generally change based on production levels or revenue. Fixed costs change somewhat over time as a company makes changes or expands, consequently hiring additional personnel or acquiring new facilities.

Fixed vs. Variable Costs

The other major cost component companies consider in cost accounting is 澳洲幸运5官方开奖结果体彩网:variable costs. Variable costs are the direct production costs that, unlike fixed costs, vary according to levels of production or sales. Variable costs are commonly designated as the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS), whereas fixed costs are expenses not usually included in COGS. Fluctua⛄tions in sales and production levels can affect variable costs if factors such as sales commissions are included in per-unit production costs.

Fixed costs plus variable costs make up the total ongoing expenses for a company examined in cost accounting for 澳洲幸运5官方开奖结果体彩网:management to analyze expenses in relation to revenues, with the goal of improving cost efficiency and 澳洲幸运5官方开奖结果体彩网:profit margins.

Some companies choose to classify some costs as a combination of fixed and variable costs. An example might be a company's electric bill, part of which is fixed, but part of which varies in accordance with production; more electricity is being used when the production machinery is running. 

The Bottom Line

Fixed costs are expenses that occur indirectly of how much a business produces, such as rent, utilities, and insurance. Unlike variable costs, fixed costs do not go away if a business doesn't produce anything. Businesses use cost accounting to calculate fixed and variable costs, create budgets, and improve profit margins.