Cost Accounting Assignment

What is fixed cost and how to calculate it?

Fixed costs are those that can’t be changed regardless of your business’s performance. Your company’s
total fixed costs will be independent of your production level or sales volume.

Also known as “indirect costs” or “overhead costs,” fixed costs are the critical expenses that keep your
business afloat. These expenses can’t be changed in the short-term, so if you’re looking for ways to
make your business more profitable quickly, you should look elsewhere.

Fixed costs will stay relatively the same, whether your company is doing extremely well or enduring hard
times. As production or sales fluctuate, fixed costs remain stable. Think of them as what you’re required
to pay, even if you sell zero products or services.

Calculating your fixed costs is relatively straightforward. One way is to simply tally all of your fixed costs,
add them up, and you have your total fixed costs. You can also use a simple formula to calculate your
fixed costs.

First, add up all of your production costs. Make sure to be clear about which costs are fixed and which
ones are variable. Take your total cost of production and subtract your variable costs multiplied by the
number of units you produced. This will give you your total fixed cost.

You can use this fixed cost formula to help.

Fixed costs = Total production costs — (Variable cost per unit * Number of units produced)

Let’s use a real-world example. Imagine you own a food truck that sells tacos. You’ll have a range of
fixed costs and variable costs that you’re required to pay each month.

If you add up everything you spent over the course of the month, it equals $4,000 in total costs. Then
factor in all the tacos you sold throughout the month — 1,000 tacos. Each taco costs $3 to make when
you consider what you spend on taco meat, shells, and vegetables. Therefore, your variable cost per unit
is $3.

Plug these numbers into the following formula:

$4,000 total production costs — ($3 * 1,000 tacos) = $1,000 fixed cost

So your monthly fixed costs in this scenario are $1,000. These costs are likely attributed to your food
truck monthly payment, auto insurance, legal permits, and vehicle fuel. No matter how many tacos you
sell every month, you’ll still be required to pay $1,000.