Total fixed cost formula

The total fixed cost formula is really an aggregation of all fixed costs that an organization incurs. These costs can be identified by examining all types of costs as activity volumes change. If a cost does not vary with the activity level, it can be considered a fixed cost. Some costs are considered mixed costs, containing both fixed and variable elements. If there is evidence of a mixed cost, the fixed portion must be extracted from the total mixed cost and included in the aggregation of all fixed costs.

The following list itemizes many of the fixed and mixed costs that a business is likely to incur, along with commentary about the elements of each one that may be considered mixed costs:

  • Bank fees. This is a mixed cost. Some fees relate to the existence of a bank account, and so are considered fixed costs. Other fees relate to activity volume, such as the check processing charge.
  • Depreciation. This is a fixed cost, unless it is depletion-based. The cost continues to be incurred until the underlying assets are fully depreciated.
  • Electricity. This is a mixed cost; a portion is needed to power a facility, irrespective of the number of people employed. The remaining portion changes with activity levels, and so is variable.
  • Insurance. This is a fixed cost within a certain range of activities or asset levels.
  • Interest expense. This is a fixed cost; the amount paid is linked to the amount of debt owed.
  • Internet fees. This is a fixed cost; there is usually a set fee for a given amount of bandwidth.
  • Rent. This is a fixed cost; it does not change, irrespective of activity volume.
  • Salaries. This is a fixed cost; the amount paid to employees does not change, irrespective of changes in activity levels.

Other costs, such as wages, supplies, and direct materials, are variable costs, and so were not included in the preceding list.

In short, the total fixed cost formula varies by organization - it requires one to sort through all costs incurred to locate fixed costs, after which these costs are summarized to derive the total fixed cost.