Committed fixed costs
Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes.
Committed fixed costs are expenses that remain constant in the short-term, regardless of fluctuations in production or sales levels. These costs are fixed because they don’t vary with the level of activity within the business. Committed fixed costs are typically long-term, contractual agreements that a company has made, such as rent payments for a building or lease payments on equipment.
Examples of committed fixed costs include:
1. Rent – This is a fixed cost that a company has to pay no matter how much they produce or sell. If a company signs a lease on a building for five years, they have committed to paying a set amount of rent for that period.
2. Insurance – Business insurance, like property insurance or liability insurance, is often a fixed cost that companies have to pay to protect themselves. This cost is predetermined and does not change based on the level of activity within the business.
3. Salary – The salary of a permanent employee is a committed fixed cost. Once a company hires an employee, they are committed to paying their salary for the duration of their employment.
It’s important for companies to be aware of their committed fixed costs and budget accordingly. These costs cannot be easily reduced in the short-term, so it’s essential to factor them into any financial planning.
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