A fixed overhead cost refers to a specific type or group of business expenses. The word overhead in business is used to describe the cost of doing business or the amount of money an individual or company must spend in order to run and maintain a functional business. Fixed means that the particular cost does not change on a monthly basis.
Certain costs in business are variable or can change daily, monthly or quarterly. For example, the cost of inventory might change depending on how many of a given product a person needs. The cost of labor may also change, if, for example, a company must pay someone to work overtime when sales volume goes up.
A fixed cost, on the other hand, does not change or fluctuate with sales volume. A fixed overhead cost remains the same whether a company sells one of an item or 1,000 of an item. Fixed overhead costs are thus predictable and generally remain the same for at least a set period of time, usually a year.
There are several different types of fixed overhead costs common in business. Rent, for example, is usually a fixed overhead cost. Most businesses will sign a lease for at least one year on office space or on retail space. The rent remains the same for this amount of time and does not go up more just because the company sells more or less of a product or service.
Certain other office expenses may also be fixed expenses. The cost of salary paid to managers may also be considered a fixed overhead cost, unless the managers are paid on a bonus structure or commission basis that is tied to sales. Interest on money borrowed, depreciation or reduced value on the building or equipment, and other such costs are also considered to be fixed since they do not vary from month to month.
Fixed overhead costs do not necessarily remain stationary forever. They may change if a landlord raises rent, or if a new manager is hired, for example. The change, however will not come from an increase or decrease in sales, and as a result, the cost will still be considered a fixed cost.
