What are "fixed costs" in budgeting?

Fixed costs in budgeting refer to expenses that remain constant regardless of the level of output or production. This means that no matter how much or how little a business produces, these costs do not change. Common examples of fixed costs include rent, salaries, and insurance.

Understanding fixed costs is crucial in budgeting because they represent a baseline level of expense that businesses need to cover irrespective of their operational performance. This characteristic makes it easier for businesses to predict and manage their overall financial obligations. In contrast to fixed costs, other types of costs fluctuate with production volume or sales performance, making them variable and more unpredictable. Therefore, recognizing fixed costs helps in effective financial planning and analysis.