Examples of fixed costs are:
They are regarded as fixed because they usually do not change (regardless of sales) during a financial year (or, the period for which a calculation needs to be made). But there are some things you should be aware of.
Rent may well be fixed annually but there are some lease agreements such as those for premises in shopping malls that require the lessee to pay a percentage of turnover (sales) in addition to the fixed rental amount. This additional payment would constitute a variable cost.
Salaries are generally regarded as being a fixed cost as they are usually changed only once annually. Where, however, some employees are paid amounts linked to sales such as commission then the commission could be regarded as a variable cost.
Wages used to be regarded as a variable cost - the workforce was increased or decreased according to production requirements at short notice. The term “package” had not crept into the vocabulary of the business world. In recent times, due to changes in the attitude of business to human resource management, combined with the rise in the bargaining power of the trade unions, wages have effectively become a fixed cost. However, any incentives paid that are directly linked to output should be separated from the wage bill and treated as a variable cost.
Electricity for lighting the offices could be regarded as fixed. Electricity consumption in a factory that varies with output could be regarded as a variable cost (but it does depend on how the electricity tariff is structured).
If not subject to change during the financial year, insurance would be regarded as a fixed cost. There may be factors that cause the premiums to fluctuate during the year that may enable one to link the changes to changes in the business sales such as increased stock levels. Although this would indicate that part of the insurance premium may be variable it is nevertheless usual to lump insurance together with the other expenses and regard it as fixed.
Whether any of the factors mentioned above that add a variable element to the fixed costs mentioned would give rise to a re-allocation of these amounts as variable costs would depend to a large degree on whether they were material (i.e. significant) amounts. In practice though, amounts that are more-or-less the same through the year are categorised as fixed costs.
You must be careful about interpreting fixed costs as costs that do not change. The view of cost as being fixed merely reflects their anticipated behaviour (relative to volumes) over a financial year (or a period for which a calculation needs to be made). It must also be noted that the total of the fixed costs could possibly represent the upper limit of the business’s capacity. In other words there may be a limit to the amount of business that can be undertaken given the resources that have been made available with the existing fixed cost structure. One can of course increase the capacity of a business by increasing the fixed costs - extend the factory, rent more space. But once you have increased the fixed-cost structure of the business you are stuck with it. And if the additional business you that were experiencing or anticipated declines or does not materialise then you could be in trouble.
An ideal business would be one which had only variable costs, but this is seldom practical. The management of a business should strive toward having as few fixed costs as possible.