What do fixed costs refer to?

Fixed costs refer to expenses that do not change regardless of the level of output or production volume. This means that even if a company produces more or less, these costs remain consistent over time. Examples of fixed costs include rent, salaries of permanent staff, and insurance. Since these costs are incurred regardless of the production level, they are critical for businesses in financial planning and forecasting, allowing companies to understand their break-even point and profitability.

In contrast, costs that increase with production volume represent variable costs, which fluctuate based on the amount of goods produced. Seasonal costs are influenced by changes in demand across different times of the year, and direct labor costs can vary based on the hours worked or production levels, thus are not fixed in nature. Understanding fixed costs is essential for managing a company's long-term financial strategy and operational efficiency.