Fixed Costs Concept

Fixed costs are entity’s costs that will remain constant independently of the positive or negative variation of the production activity and sales. For example, cost with permanent staff or the facilities’ rents are fixed costs. Yet, the costs with raw materials or the costs with consumed energy in the production process are clearly costs that vary with the activity, being for that, considered as variable costs.

As it’s easy to understand, due to the existence of fixed costs, the production average costs are reduced when the production raises, fact that explains the company’s needs with high fixed costs to produce high quantities of products. However, when exists the risk that the activity doesn’t keep stable to high levels, the companies have tendency to ease its costs structure, transforming fixed costs into variable costs and this way keep stable the productions’ average costs. Such can be achieved, for example, through the external resource (outsourcing) for the performance of certain activities.

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.