What are "fixed costs" in the context of budgeting?

Fixed costs refer to expenses that do not change with the level of production or output within a certain range of activity. This means that whether a business produces a lot, a little, or none at all, fixed costs remain the same over time. Common examples of fixed costs include rent, salaries of permanent staff, insurance, and property taxes.

Understanding fixed costs is crucial for budget planning because they represent ongoing financial commitments that businesses must cover regardless of their sales volume. This stability allows businesses to better predict future expenditures and assess their profitability. In contrast, other types of costs, such as variable costs, change directly with production levels, making them less predictable in the budgeting process.