What are fixed costs?

Fixed costs are expenses that remain constant regardless of the level of production or sales within a certain range of activity. This means that whether a company produces a small number of units or a large number of units, the total amount of fixed costs—such as rent, salaries of permanent staff, and depreciation—does not change.

Understanding fixed costs is crucial for budgeting, forecasting, and financial analysis, as they represent ongoing expenses that a business needs to cover regardless of its output. This nature of fixed costs helps companies manage their budgets effectively, allowing for more predictable financial planning.

The other choices describe different kinds of costs that do not align with the definition of fixed costs. For example, costs that vary with the production level are known as variable costs, while costs incurred only during peak seasons would be seasonal costs and not fixed. Additionally, costs associated with variable expenses directly refer to costs that fluctuate with production levels, further distinguishing them from fixed costs.