Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Fixed Costs In Managerial Accounting Fixed costs are costs that do not change even if the volume of production or sales changes. This means that fixed costs must be paid regularly, regardless of the amount of product or service produced or sold. Examples of fixed costs are rent, insurance costs, salary expenses for regular employees, and interest on loans. Fixed costs are also referred to as "fixed costs" or "overhead costs". In financial reports, fixed costs are considered expenses that must be paid to carry out business operations and are often shown as part of operating costs or overhead costs. Fixed costs can assist management in planning and controlling the budget and calculating the break-even point. In financial management, fixed costs are often considered as sunk costs or costs that have been incurred and cannot be returned. Therefore, investment decision making is usually based on variable costs and management tends to consider fixed costs as a more static factor. Even though fixed costs don't change in the short run, they can change in the long run. For example, the cost of rent may increase when the lease expires or the cost of a permanent employee's salary may increase if there is a wage increase. It is important to understand the difference between fixed costs and variable costs because these differences can affect business strategy and profitability. For example, if a business has high fixed costs, selling additional products can help reduce fixed costs proportionately, increasing profit margins and business profitability. Conversely, if variable costs are higher, then selling additional products may not generate the same profit margins, because of the additional costs required to produce the additional products. In making business decisions, it is important to consider the overall fixed costs and variable costs, so that businesses can make wise decisions and generate optimal profitability. Calculation of fixed costs and variable costs is also important in short-term and longterm financial planning. In short-term financial planning, fixed costs must be identified and prioritized in the budget, so that businesses can ensure that they have sufficient funds to meet the financial obligations associated with these fixed costs. In long-term financial planning, management must consider fixed costs in making investment decisions and business growth strategies. For example, if a business is planning expansion to a larger location or investing in new machinery and equipment, additional fixed costs must be identified and considered in an investment feasibility analysis. In order to increase profitability, management may consider strategies to reduce fixed costs, such as outsourcing or sharing facilities, cutting employees, or improving the efficiency of business operations. However, reducing fixed costs must be done with care, so as not to interfere with business performance and product or service quality. In conclusion, fixed costs are costs that do not change even if the volume of production or sales changes and are usually expenses that must be paid to carry out business operations. Understanding the difference between fixed costs and variable costs is important for making wise business decisions and successful financial strategies. Here are some examples of fixed costs in a business: • Rent or mortgage payment for the place of business • Premium insurance costs • Salary costs for regular employees, such as management or administrative staff • Loan interest costs for fixed debt • Marketing costs, such as predetermined advertising and promotion costs • Property tax charges • Maintenance and routine maintenance costs, such as cleaning costs, electricity and water • The cost of renting equipment or machines that are subscribed for a certain time. In the example of a manufacturing business, fixed costs could include: • Leases or mortgage payments for factories or production facilities • Salary costs for regular employees, such as production management or administrative staff • Loan interest costs for fixed machinery and equipment • Property tax charges for production buildings • The cost of renting production facilities or heavy equipment that is subscribed for a certain time. Keep in mind that some costs that may be considered fixed by a business, can turn into variable costs if the volume of production or sales changes. For example, the cost of raw materials might be considered a fixed cost if a business has contracts to purchase raw materials for a certain period of time. However, if demand falls and production volumes decrease, raw material costs can turn into variable costs. Therefore, it is important to monitor costs regularly and make adjustments when necessary. In some situations, fixed costs can become a barrier to business growth. If a business is unable to generate sufficient revenue to cover its fixed costs, then they can run into financial difficulties. If this happens, the business must find ways to reduce its fixed costs or increase revenue to offset those fixed costs. One way to reduce fixed costs is to consider outsourcing or sharing facilities. Businesses may consider renting shared space with other businesses to reduce rental costs or property tax charges. Apart from that, businesses can also consider using outsourcing services to reduce fixed labor costs. Pruning employees can also be an option to reduce fixed costs, but it must be done with care and careful consideration. If too many employees are laid off, then the business can experience difficulties in running its operations and pursuing growth. Therefore, management must consider the long-term impact of cutting employees and reducing employees wisely and sustainably. In some cases, businesses may consider selling their fixed assets to reduce fixed costs. However, this should be considered with caution, as selling fixed assets can disrupt business operations and increase short-term costs. Before deciding to sell fixed assets, a business must consider the long-term profit potential and the short-term impact of such actions. In order to increase profitability, businesses must consider strategies to increase revenue and optimize their operations. This could include developing new products, expanding market share, or increasing operational efficiency to reduce variable costs. By carefully considering fixed costs and variable costs, businesses can make smart financial decisions and successful business strategies.