What are fixed costs?

Fixed costs refer to expenses that remain constant regardless of the level of production or sales within a certain range. This includes costs such as rent, salaries, and insurance that a business must pay even when it produces no goods or services. Since these costs do not fluctuate with production levels, they provide stability in budgeting and financial planning.

In contrast, costs that vary with production are classified as variable costs, as they change depending on the level of output. Additionally, costs linked directly to variable output are also not fixed but are instead tied to the volume of production. Finally, while it is true that fixed costs can be analyzed in both short-run and long-run contexts, they do not solely pertain to long-run scenarios; they exist in both. Therefore, identifying fixed costs as expenses that do not change with the level of production is key to understanding their role in financial analysis and business operations.