What Does fixed cost Mean
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 give it its shape:
-Cost, in the first place, comes from Latin. Exactly it derives from “constare”, which can be translated as “square”.
-Fixed, secondly, it also emanates from Latin. In his 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 economic outlay that is carried out to acquire or maintain a product or a service. Something fixed , on the other hand, has stability or is unchanging.
The fixed costs in this context are those which do not vary when minor changes occur in the level of activity of a company. The variable costs , however, are modified with fluctuations in the volume of production .
Generally, fixed costs are associated with the structure of the company . These types of costs involve periodic expenses (monthly, annual, etc.) that can be anticipated. Variable costs, as the name suggests, vary more frequently and are more sensitive to changes in the firm's output.
An example of a fixed cost is renting an office . Suppose that a law firm rents an office in the micro-center of a city for 25,000 pesos per month, signing a two-year rental contract. This monthly expense is a fixed cost: it does not matter if the study has five, twenty or one hundred clients, nor if it invoices 500,000 or 2,000,000 pesos; said cost will not vary.
The labor also often seen as a fixed cost. If a company has 50 employees, who are paid $ 100,000 in total by way of salary, this $ 100,000 per month is 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, cuts in compensation, etc.
In addition to all the above, we can establish a series of hallmarks of the fixed cost such as the following:
-There are two types of fixed costs: the discretionary, which is the set of planned expenses that can be reduced and even disappear without the infrastructural of the company being damaged, and the compromised. This, for its part, cannot be reduced in a forceful way because doing so as well as eliminating it would bring adverse consequences for the company.
-They can be anticipated and, in the same way, they can be easily controlled.
-The management of the company is responsible for making all the decisions that have to do with the aforementioned costs.
-In an undeniable way, it is closely related to the productive capacity of the company in question.
-It is a type of expense that must be assumed in an unquestionable and inevitable way and must always be included in any type of accounting management plan that is carried out within the company.