Fixed Costs

Fixed costs do not change within the relevant range of activity. As long as the activity level remains within the relevant range, the total amount of fixed costs does not change with a change in activity level such as production volume. However, the cost per unit decreases as the activity level increases and increases as the activity level decreases.

Fixed costs are costs that do not change in total as the level of production changes, as long as production remains within the relevant range. The relevant range is the range of production within which the fixed cost remains unchanged. As long as the production activity remains within the relevant range, an increase in the number of units produced will not cause an increase in total fixed costs and a decrease in the number of units produced will not cause a decrease in total fixed costs.

Fixed costs ⇒ are best explained by using production in a factory as an example. A factory has the capacity to produce a certain maximum number of units. As long as production is between zero and that maximum number of units, the fixed cost for the factory will remain unchanged.

However, once the level of production exceeds the capacity of the factory, the company will need to build (or otherwise acquire) a second factory.

Building the second factory will increase the fixed costs as the company moves to another relevant range.
Within the relevant range of production, the total fixed costs will remain unchanged, but the fixed costs per unit will decrease as the level of production increases.

Over a long enough period, all costs will behave like variable costs. Fixed costs such as property, plant, and equipment are fixed in the short term; but over a longer period of time, the company can expand its factory or move to another facility, so fixed costs become variable.

Period costs can be fixed or variable, and production costs can also be fixed or variable