Which statement explains fixed costs?

Which statement explains fixed costs?

• A. They vary with production levels
• B. Fixed costs are costs that are not affected by the levels of business carried out
• C. They are always paid monthly
• D. They relate only to raw materials

Answer: (B)

Fixed costs stay the same regardless of how much you produce or how actively you do business in the short term. They’re incurred even when output is zero and don’t change with levels of activity within the relevant range. Examples include rent, salaries for permanent staff, insurance, and depreciation on equipment. This is what distinguishes them from variable costs, which rise and fall with production, like raw materials or direct labor that only occur as you manufacture more. The key idea is that payment timing (monthly, quarterly, yearly) doesn’t define a fixed cost—the defining feature is that the cost does not vary with output. The statement that fixed costs are not affected by the levels of business carried out captures this, while the other descriptions—costs that vary with production, costs paid strictly every month, or costs tied only to raw materials—do not describe fixed costs.

Fixed costs stay the same regardless of how much you produce or how actively you do business in the short term. They’re incurred even when output is zero and don’t change with levels of activity within the relevant range. Examples include rent, salaries for permanent staff, insurance, and depreciation on equipment. This is what distinguishes them from variable costs, which rise and fall with production, like raw materials or direct labor that only occur as you manufacture more.

The key idea is that payment timing (monthly, quarterly, yearly) doesn’t define a fixed cost—the defining feature is that the cost does not vary with output. The statement that fixed costs are not affected by the levels of business carried out captures this, while the other descriptions—costs that vary with production, costs paid strictly every month, or costs tied only to raw materials—do not describe fixed costs.