Which of the following is an example of a fixed expense for a typical healthcare facility

A fixed cost is a cost that does not change over the short-term, even if a business experiences changes in its sales volume or other activity levels. This type of cost tends to instead be associated with a period of time, such as a rent payment in exchange for a month of occupancy, or a salary payment in exchange for two weeks of services by an employee. It is of some importance to understand the extent and nature of the fixed costs in a business, since a high fixed-cost level requires a business to maintain a high revenue level in order to avoid generating losses. Conversely, a business with low fixed costs can continue to operate profitably even when its sales are low. Here are several examples of fixed costs:

• Amortization. This is the gradual charging to expense of the cost of an intangible asset (such as a purchased patent) over the useful life of the asset.

• Depreciation. This is the gradual charging to expense of the cost of a tangible asset (such as production equipment) over the useful life of the asset.

• Insurance. This is a periodic charge under an insurance contract.

• Interest expense. This is the cost of funds loaned to a business by a lender. This is only a fixed cost if a fixed interest rate was incorporated into the loan agreement.

• Property taxes. This is a tax charged to a business by the local government, which is based on the cost of its assets.

• Rent. This is a periodic charge for the use of real estate owned by a landlord.

• Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours worked.

• Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable element, but is largely fixed.

The reverse of fixed costs are variable costs, which vary with changes in the activity level of a business. Examples of variable costs are direct materials, piece rate labor, and commissions. In the short-term, there tend to be far fewer types of variable costs than fixed costs.

A business is sometimes deliberately structured to have a higher proportion of fixed costs than variable costs, so that it generates more profit per unit produced. Of course, this concept only generates outsized profits after all fixed costs for a period have been offset by sales. For example, a software development company has a fixed cost requirement of $500,000 per month and essentially no cost per unit sold, so revenues of $400,000 per month will generate a loss of $100,000, but revenues of $600,000 will generate a profit of $100,000. See the cost-volume-profit analysis for more information.

Over the long term, few costs can be considered fixed. For example, a 10-year property lease can be considered a fixed cost over a nine-year period, but is a variable cost if the decision period extends past 10 years.

Part of creating a budget is distinguishing between fixed and variable expenses:

• Fixed expenses: These are costs that largely remain constant, such as your monthly rent or mortgage.
• Variable expenses: These are costs that vary or are unpredictable, such as dining out or car repairs.

Definition of fixed expenses

Fixed expenses are those that remain constant within your budget, though they may change occasionally, for example, if you switch to a new cellphone service provider or your landlord raises your rent.

Fixed expenses are paid at regular intervals and may vary slightly, change significantly or stay the same, depending on the type of expense. Monthly expenses are common, but fixed expenses may also occur weekly, quarterly, twice a year and yearly. Knowing your bills’ intervals can help in budgeting. If you pay car insurance twice a year, for example, divide the payment premium by six to get the monthly cost and add that amount to your monthly budget.

Examples of fixed expenses

Examples of fixed expenses include:

• Rent or mortgage payments
• Car payments
• Other loan payments
• Insurance premiums
• Property taxes
• Phone and utility bills
• Child care costs
• Tuition fees
• Gym memberships

Definition of variable expenses

Variable expenses change regularly and may be directly influenced by the choices you make day to day. Unlike fixed expenses, variable expenses can be less predictable and more volatile, which isn’t to say that variable expenses aren’t necessary; many essentials fall into this category.

Because of their unpredictable nature, some households struggle to track and budget for variable expenses. Unless you add up every grocery receipt or rely on a budgeting app, you may not know how much you spend on food every month, for example, making it easy to overspend without realizing it. For help with budgeting sign up for Bankrate’s myMoney to categorize spending and identify ways to cut expenses.

Some variable expenses can be more easily controlled than others. When purchasing clothing, for example, you can opt to buy cheaper items or wait for a sale to save money. Other variable expenses can’t be controlled, such as emergency medical expenses. If you get sick and need to see a doctor urgently, you may need to cover some or all of the costs, depending on whether you have health insurance.

Examples of variable expenses

Common variable expenses include:

• Groceries and dining out
• Clothing
• Personal care
• Entertainment
• Gasoline
• Home and car repairs
• Medical bills

Budgeting for fixed and variable expenses

Budget for essential expenses first, such as housing, car payments and child care. Most essentials are fixed expenses, and it’s important to ensure these are covered each month before you decide how much you’ll devote to variable expenses like entertainment and dining out.

It’s also important to track nonessential spending, which can target areas for reduced spending if you want to save more money each month.

The 50/30/20 rule can help you budget for fixed and variable expenses. It calls for allocating 50 percent of your money to be set aside for things you need, 30 percent to nonessential things and 20 percent to savings.

How to save on fixed and variable costs

If you’re looking for ways to reduce your monthly expenditures, start by reducing your fixed or variable costs — or both. Saving money in either category is possible, but the process for each can differ.

Fixed expenses can take more time to adjust, though it’s still possible to cut costs. Rent, for example, can be reduced by finding a cheaper home or apartment, but you may have to wait until the lease expires to avoid losing a security deposit or paying a fee.

On the other hand, some variable expenses are much easier to adjust in a pinch. If an emergency expense comes up and leaves you short on cash for the month it can be difficult to reduce fixed expenses like car or rent payments to make ends meet. Bringing down variable expenses, however, is usually possible. For example, you can trim your grocery bill and avoid dining out or purchasing nonessential items.

Bottom line

No matter how much you spend each month, your expenditures include both fixed and variable expenses. Understanding the difference is key to planning your budget and spending your money more wisely. By dividing your expenses into fixed and variable categories and accounting for all of them in a monthly budget, you can get a clearer picture of where your funds are being allocated and spot opportunities to reduce costs.

–Freelance writer Lisa Melillo contributed to a previous version of this article.

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