What Are Fixed Costs? Concepts and Impact on Business

1. Definition of fixed costs

Fixed Cost are expenses that a business must pay periodically, not changing according to production output or revenue in a certain period of time. Regardless of whether the business is strong or weak, these expenses still need to be paid.

Common examples of fixed costs include:

Office and factory rent
Fixed employee salary
Asset depreciation expense
Periodic maintenance costs
Administrative and legal fees

Characteristic:

Unaffected by business activity level: Regardless of how much a business produces, fixed costs remain unchanged in the short run.
Can be adjusted according to development strategy: Although not changing immediately, in the long run, fixed costs can increase or decrease depending on the size and direction of the business.
Creates financial pressure if not well controlled: Businesses need to have a plan to optimize fixed costs to maintain profits, especially in difficult times.

Why do businesses need to control fixed costs?

Effective fixed cost management helps businesses optimize their budgets, improve their competitiveness and ensure sustainable operations. By monitoring, evaluating and optimizing fixed costs, businesses can reduce financial risks and maximize profits.

2. Characteristics of fixed costs

Below are important characteristics of fixed costs that businesses need to note:

Stability: Fixed costs remain at a certain level over a given period of time (month, quarter, year) and are not affected by short-term fluctuations. For example, office rent or administrative staff salaries remain the same regardless of changes in revenue.
Constant with output or revenue: Unlike variable costs, fixed costs do not increase or decrease as a business expands or shrinks production. Whether output doubles or halves, expenses such as rent and insurance remain the same.
Periodicity: Businesses need to pay fixed costs periodically (monthly, quarterly), regardless of whether the business situation is favorable or difficult. This requires businesses to have a suitable financial plan to ensure stable cash flow.
Unaffected by activity level: Even as a business expands or faces an economic downturn, fixed costs remain at their original levels. This creates financial pressure when revenue declines, but also benefits the business as it grows, since fixed costs do not increase proportionally.
Large initial investment: Businesses often have to spend a significant amount of money to invest in fixed assets such as factories, machinery, and equipment. These investments play an important role in long-term operations but can create a financial burden if not managed well.
Cost allocation over time: Fixed costs are not recorded in full in one period but are gradually allocated over time through depreciation. This helps businesses spread costs reasonably, avoiding sudden impacts on profits.

3. Components of fixed costs

Below are the main components of fixed costs that businesses need to manage effectively:

Labor wages: Including salaries of administrative, management, maintenance staff... which do not change according to production volume.
Rent: Includes office, warehouse and factory rental costs under long-term or short-term contracts.
Electricity, water, internet: Although there are variable factors, they are still included in fixed costs due to regular occurrence.
Insurance: Social insurance, health insurance for employees and business property insurance.
Cost of purchasing investment materials: Including raw materials, labor tools, long-term production support equipment.
Fixed asset depreciation costs: Machinery, equipment, factories, means of transport... all need to be depreciated periodically.
Bank interest: If a business borrows money to invest, the interest becomes part of the fixed costs that need to be controlled.

4. Meaning of fixed costs

Fixed costs are expenses that a business must pay periodically, and do not change with the level of activity or output over a certain period of time. They play an important role in financial management and business operations.

4.1. Fixed costs are mandatory expenses.

Mandatory nature: Businesses must pay fixed costs such as rent, employee salaries, interest and insurance, regardless of business performance.
Impact on business operations: Because it accounts for a large proportion of total costs, fixed costs have a significant impact on production and business.

4.2. Financial pressure due to high fixed costs

Impact on profits: When fixed costs are high but output is low, businesses may have to adjust selling prices or accept reduced profits, even facing the risk of losses.
The importance of revenue and output: To use resources effectively, businesses need to plan production and business reasonably to ensure sales are enough to cover fixed costs.

4.3. Determine the minimum cost

Financial planningFixed costs help businesses forecast the level of expenses needed to maintain operations, thereby building a reasonable financial plan.
Basis for determining cost: Is an important factor in calculating the cost of products or services, helping businesses set reasonable prices.

4.4. Support business decision making

Business performance evaluation: Determining fixed costs helps businesses calculate the break-even point and make decisions that are appropriate to their financial situation.
Control costs and adjust strategyComparing actual costs with estimates helps businesses control their budgets and promptly adjust business plans when needed.

In short, fixed costs play an important role in financial planning, product pricing and business decision making. Good management of fixed costs helps businesses maintain stability and sustainable development.

5. Classification of fixed costs

Fixed costs are expenses that a business has to pay periodically and do not change with the level of business activity. Here is how fixed costs are classified based on different factors:

5.1. Based on management factors

Fixed costs are those costs that are directly related to the machinery, equipment, facilities, and basic organizational activities of the business. They are rigid and cannot be deferred, such as rent, employee salaries, and equipment maintenance costs.

Fixed costs are costs that are not necessarily incurred during the production process and are dependent on management decisions. For example, advertising costs, increasing human resources, and product research and development all fall into this category.

5.2. Based on allocation factors

Fixed recurring costs are costs that are calculated in advance and are incurred regularly over a period of time. For example, electricity, water, rent, and monthly employee salaries are all fixed recurring costs.

Fixed costs may not be allocated at regular intervals but are a one-time investment. They may vary conventionally over a long period of time, for example, depreciation costs on machinery.

5.3. Level fixed costs

Stepped fixed costs are costs that are expected to occur when changes in the level of activity occur. For example, when output exceeds a certain level, a business needs to hire more workers or increase the scale of operations.

External factors affecting fixed costs include increases in electricity, water, and labor costs. Meanwhile, internal factors are changes in the scale of production of the enterprise, such as factory expansion or increase in the number of employees.

In short, classifying fixed costs helps businesses manage and predict costs effectively, thereby making appropriate business decisions.

6. Fixed Cost Calculation Formula

Fixed costs are one of the important factors affecting the profitability and operational capacity of a business. Accurately determining fixed costs helps business owners and accountants come up with reasonable financial strategies. Below are common formulas for calculating fixed costs.

6.1. Direct method

Formula for calculating fixed costs by direct method:

FC = Fixed Cost = Total Cost – Variable Cost

In there:

FC (Fixed Cost): Total fixed costs of the business.
Total cost: Total operating costs over a given period of time.
The variable costs: Costs vary with output or scale of operation.

For example: If the total operating cost of the business is 500 million VND and the variable cost is 300 million VND, then the fixed cost will be:

FC = 500 – 300 = 200

6.2. Activity-based method

This method helps to calculate fixed costs based on changes in the level of activity of the business. The formula includes two calculations as follows:

Formula 1

FC = (Highest operating fee – Lowest operating fee)/(Highest operating unit – Lowest operating unit)

Formula 2

FC = Highest/Lowest Operating Cost – (Variable Cost per Unit x Highest/Lowest Operating Unit)

In there:

Highest/Lowest Operating Fee: The highest or lowest cost level over a period of time.
Variable cost per unit: Variable cost per unit of product or service.
Highest/lowest active unit: The highest or lowest quantity of products or services produced/sold.

For example:
A business has the highest operating cost of 600 million VND when producing 5,000 products, the lowest operating cost is 400 million VND when producing 3,000 products. The variable cost per product is 50,000 VND. Apply formula 2:

FC = 600 – (50,000 x 5,000) = 600 – 250 = 350 million VND

7. Distinguish between fixed costs and variable costs

When managing your finances, it is important to distinguish between fixed and variable costs. Here is a comparison table to help you better understand the two types of costs:

Criteria	Fixed Costs	Variable Costs
Define	Are costs that do not change when output or revenue changes.	Are costs that vary directly with output or revenue.
Characteristic	Easy to predict and calculate in advance. Fixed costs still exist even when there is no activity.	Difficult to predict and calculate in advance. Variable costs are zero without activity.
For example	Rent, depreciation of fixed assets, bank interest, insurance premiums.	Raw materials, manufacturing employee wages, energy costs, transportation costs.
Impact on Price	Decreases as output increases.	Increases as output increases.
Count in inventory	Not included in inventory valuation.	Included in inventory valuation time.
Related factors	Time related, not output related.	Regarding production volume, it depends on the output.

8. Tips to help reduce fixed costs

Fixed costs are expenses that remain constant regardless of changes in revenue or output. Controlling these costs well helps businesses optimize profits and improve competitiveness. Here are some effective ways to reduce fixed costs:

Outsource services instead of permanent staff: Non-routine tasks such as accounting, financial consulting, or maintenance can be outsourced to save on labor and training costs.
Choose the right supplier: Compare prices, quality and after-sales policies to optimize raw material costs.
Eliminate unprofitable products: Evaluate product portfolio to eliminate underperforming items and focus on products with higher potential.
Optimize advertising and promotion costs: Analyze the performance of each campaign to ensure marketing budgets deliver real value.
Technology application: Using management software and automation systems helps optimize processes, reduce labor and save operating costs.

Applying these strategies helps businesses control costs effectively, improve operational performance and develop sustainably.

9. Benefits of using Bizzi Expense to manage fixed costs

Bizzi Expense is a solution that helps businesses automate fixed cost management, increase transparency and optimize cash flow. Below are the outstanding benefits of using Bizzi Expense in business financial operations:

Automate the expense approval process

Bizzi Expense helps simplify and automate the entire expense creation and approval process, minimizing errors and shortening processing time. As a result, all expenses are strictly controlled, quickly approved, ensuring transparency in financial management.

Set up flexible spending policies

Businesses can easily set up separate spending policies for each department, project or fixed cost type such as office rent, fixed asset depreciation. This helps optimize the budget and avoid unnecessary waste.

Budget and track expenses in real time

Bizzi Expense allows businesses to create detailed budgets for each department and project, and track cash flow in real time. As a result, businesses can quickly identify ineffective spending and make timely adjustments to optimize finances.

Seamless integration with ERP systems

Bizzi Expense connects easily with ERP systems, helping to synchronize financial data accurately and continuously. This gives businesses a more comprehensive view of their financial situation, helping them make more accurate strategic decisions.

Increase transparency and accountability in spending

With Bizzi Expense, businesses can establish a clear and transparent cost control process. This not only helps prevent misuse of funds but also promotes accountability in internal financial management.

Deploying Bizzi Expense not only helps businesses minimize financial risks but also optimizes fixed cost management processes, aiming for sustainable development and higher business efficiency.

What is fixed cost? Concept and impact on business