In order to know the meaning of the term fixed cost it is necessary that we proceed to discover the etymological origin of the two words that shape it:
-Costo, first, comes from Latin. Exactly derived from "constare", which can be translated as "square."
-Fixed, secondly, also emanates from Latin. In its case, it comes from the adjective "fixus", which is equivalent to "nailed". It is a word that is the participle of the verb "figere", which can be translated as "nail".
The idea of cost is used to name the financial outlay which is carried out to acquire or maintain a product or a service. Something fixed on the other hand it has stability or is invariable.
The fixed costs , in this framework, are those who do not vary when there are small changes in the level of activity of a company. The variable costs instead, they change with fluctuations in the volume of production .
In general, fixed costs are associated with structure of the company . This type of costs implies periodic expenses (monthly, annual, etc.) that can be foreseen. Variable costs, as the name suggests, vary more frequently and are more sensitive to changes in the firm's production.
A example fixed cost is the office rental . Suppose a law firm rents an office in the center of a city for 25,000 pesos per month, signing a rental contract for two years. This monthly expense is a fixed cost: it does not matter if the study has five, twenty or one hundred clients, or if it invoices 500,000 or 2,000,000 pesos; Such cost will not vary.
The workforce It is also usually considered a fixed cost. If a company has fifty employees, who pay a total of $ 100,000 as a salary, these $ 100,000 per month constitutes a fixed cost. It is common for employers to demand greater labor flexibility from governments so that the fixed cost of labor becomes a variable cost, susceptible to reductions through the elimination of social charges, compensation cuts, etc.
In addition to all of the above, we can establish a series of fixed cost identity signs such as the following:
-There are two types of fixed costs: the discretionary one, which is the set of planned expenses that can be reduced and even made disappear without the company's intra-structure being damaged, and the one committed. This, meanwhile, cannot be reduced bluntly because doing so and eliminating it would have adverse consequences for the company.
-They can anticipate and, in the same way, can be easily controlled.
-The company management is responsible for making all the decisions that have to do with the aforementioned costs.
-In an undeniable way, it is closely related to what is the productive capacity of the company in question.
-It assumes a type of expense that must be assumed in an unquestionable and unavoidable way and must always be included in any type of accounting management plan that is carried out within the company.