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What is a fixed expense?

Author:
Harold Averkamp, CPA, MBA

Definition of Fixed Expense

A fixed expense is an expense whose total amount does not change when there is an increase in an activity such as sales or production. The words within a relevant or reasonable range of activity are normally added to the definition because at an extremely high volume or low volume, a change will likely occur.

fixed expense definition

Examples of Fixed Expenses

Let’s assume that a retailer’s monthly rent is $2,000. If the rent will remain at $2,000 whether the monthly sales are $15,000 or $30,000, we will say that the rent is a fixed expense. (Of course, if sales triple or drop to be 20% of the normal amount, the rent will likely have to change. Nonetheless, the present rent of $2,000 is considered to be a fixed expense since the extreme conditions are outside of the relevant range for short-term analyses.)

Other examples of expenses that are likely to be fixed within a reasonable range of retail sales include:

  • The store manager’s annual salary
  • The depreciation expense for the buildings, fixtures, and equipment
  • The fixed contracts for security, maintenance fees, phones, internet service, insurance, lighting, advertising, etc.

Knowing the amount of a company’s fixed expenses assists in understanding how the retailer’s net income will change as volume changes. The total amount of fixed expenses can also be used to quickly estimate a company’s break-even point.

FAQ

What is a fixed cost?
A fixed cost is one that does not change in total within a reasonable range of activity.
Learn more about fixed costs

What is a variable expense?
An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity.
Learn more about variable expenses

What is a variable cost?
A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume or activity.
Learn more about variable costs

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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