Common fixed costs

Definition

Common fixed costs are fixed costs that support more than one business segment. These costs do not change with the level of production or sales and cannot be traced directly to any single segment.

5 Must Know Facts For Your Next Test

1. Common fixed costs remain unchanged regardless of production levels within the relevant range.
2. Examples include salaries of executives, rent for shared facilities, and general administrative expenses.
3. These costs are not allocated to individual segments because they support multiple areas of the business.
4. In absorption costing, common fixed costs are included in the product cost, whereas in variable costing, they are treated as period expenses.
5. Understanding common fixed costs is essential when making decisions about profitability and segment performance.

Review Questions

• What distinguishes common fixed costs from traceable fixed costs?
• How are common fixed costs treated differently in variable costing compared to absorption costing?
• Why is it important to identify common fixed costs when evaluating segment performance?

Related terms

Traceable Fixed Costs: Fixed costs that can be directly attributed to a specific business segment.

Absorption Costing: A costing method that includes all manufacturing costs, both variable and fixed, in the cost of a product.

Variable Costing: A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable overhead—in the cost of a product.