How to Calculate the Average Fixed Cost

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Within the world of management accounting, there are two main types of costs: variable and fixed. Variable costs change with increases and decreases in production. Examples include inventory and direct labor. Fixed costs remain the same regardless production levels; that is, increases or decreases in the level of output do not effect these expenses. Examples include certain administrative (indirect) labor positions such as Human Resources and Accounting or building rents.

Things You'll Need

• Request an account statement with all accounts. You can usually request this from Accounting. It may even have the fixed costs separated out for you. You will need an account statement for at least two different time periods. Common time periods are monthly, quarterly or annual statements.

• Identify the fixed costs for the two time periods. Fixed costs are those costs which do not change when production levels change. Go through each line item. If the amount stays the same by month or by quarter, it is probably a fixed cost. Common fixed costs are rents, utilities and administrative labor.

• Sum the fixed costs from two different time periods. Let's say you've obtained the statement of accounts for Quarter 1 and Quarter 2 and the sum is \$10,000 and \$11,000, respectively.

• Take the sum of the two time periods and divide by 2 for an average fixed costs. \$10,000 + \$11,000 is \$21,000. \$21,000 / 2 = \$10,500. This number represents average fixed costs for the first two quarters of the year.

References

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