What is a key characteristic of fixed costs?

A fundamental characteristic of fixed costs is that they remain constant regardless of activity levels. This means that whether a business produces a high volume of goods or none at all, the fixed costs, such as rent, salaries of permanent staff, and insurance, do not change. For instance, if a factory has to pay a monthly rent, this rent must be paid irrespective of how many products are manufactured or sold during that month. This stability enables businesses to predict and plan for their fixed expenses over time, allowing for more accurate budgeting and financial forecasting.

On the other hand, costs that do fluctuate with activity levels are classified as variable costs; these change based on the production volume. The assertion that fixed costs are always higher than variable costs does not hold true universally, as it depends on the specific context and operational structure of a business. Lastly, fixed costs are typically predictable as they do not vary month to month, which is contrary to being unpredictable. Therefore, the understanding that fixed costs remain constant, irrespective of the level of business activity, is crucial for effective financial management.