These are the costs which remain constants irrespective of the quantum of output within and up to the capacity that has been built up. Examples of such costs are: rent, insurance charges, management salary etc.
Fixed Cost is divided into :
(i) committed fixed costs and
(ii) discretionary fixed costs.
Committed Fixed Costs: This consists largely of those fixed costs that arise from the possession of plant, equipment and a basic organizational structure. For example, once a building is constructed and plant is installed noting much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc.
Discretionary Fixed Costs: These are those costs, which are set at fixed amount for specific time periods by the management in the budgeting process. These costs directly reflect top management policies and have no particular relationship with volume of output. These costs can therefore be reduced or eliminated entirely, if the circumstances so require.