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Fixed Costs
Fixed Costs are defined as expenses that do not change in relation to the activity of the business

Fixed Costs are defined as expenses that do not change in relation to the activity of the business. So no matter how many sales you make your costs will remain the same for a given period of time.  A good example of a fixed cost is monthly rent or monthly salary.  Knowing your fixed costs will help you in creating a budget and will alert you as to how much cash you will need each month to cover your fixed costs.

Traceable Fixed Costs are costs that can be traced back to a segment.  Depending on how in depth you like to manage your costs you may separate the traceable fixed costs from the common fixed costs.  A Common Fixed Cost could be rent if the rent encompassed all segments of the business, if the rent were to disappear with a segment of the business, the rent would then be traceable to that particular segment.  For a business that manufactures 3 types of tables and each type of table has their own manufacturing plant the rent for each plant could be traced back to its own segment.

Common Fixed Costs are costs that cannot be traced back to a particular segment and these costs support the operations of the business.  For one receptionist to support the 3 table manufacturing plants her salary could not be traced back to any one individual plant and if one plant were to disappear the receptionist would still be required and would continue to be a fixed cost.  It is not always easy to determine whether a cost is traceable or not and the best method to use to determine a traceable cost is to remove a segment, if the cost disappears with the segment then the cost is traceable.

Fixed Costs per unit will change with the amount of activity.  A fixed cost such as rent could be assigned to each item of inventory produced.  For a fixed monthly rent cost of $2,000 and an activity level of 1,000 units produced in a month the fixed cost per unit is $2.  If the activity level increased to 2,000 units per month the new fixed cost per unit would be $1.  Each item of inventory would have a fixed cost of $1 assigned to it when determining the cost to produce one item.

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