1.3 Fixed Costs
These are the costs to be paid by a business for the business once the business has been set-up. These include all the monthly expenses incurred as a direct result of running the business.
Fixed Costs
Fixed costs are costs that do not change when sales or production volumes increase or decrease. This is because they are not directly associated with manufacturing a product or delivering a service. As a result, fixed costs are considered to be indirect costs.
The item that should be obviously listed first is that of the Entrepreneur’s salary, as it is the business itself that will sustain its owner. These costs are called fixed as they recur on a monthly basis even though their amounts might differ from month to month. For example rent is a fixed cost and from month to month it is stagnant, however electricity is also a fixed cost as it recurs monthly although its amounts will definitely differ from month to month.
Tasks
Work through the example that follows and then using the same methodology and procedure, work out the fixed costs or running expenses of your own business.
Example
Mr. Mohammed is a shop owner near a township, he pays wages to two of his workers at the end of each week for about R200, his rent is R600, his transport to and from his business is R180, his water and electricity bill for the month is on average about R150 and his telephone bill for the month is about R50. His salary from the business is about R2Â 000. Thus for the month his costs would be:
Case Studies
Watch the following video to gain some insight into what fixed costs are: