What are fixed costs in a business context?

Fixed costs refer to expenses that do not change regardless of the level of goods or services produced by a business. This means that whether a company produces 1 unit or 1,000 units, the fixed costs remain the same. Common examples of fixed costs include rent, salaries of permanent staff, and insurance. These costs are essential for the operation of the business and must be paid regardless of the company’s activity level.

In contrast, costs that fluctuate with production levels are known as variable costs, reflecting changes based on output. Costs that are strictly associated with variable production or are limited to a specific department, like the sales department, do not capture the essence of fixed costs, which are broadly applicable across the business's operations.