Fixed Overhead
Indirect manufacturing costs that remain constant regardless of production output levels.
What is Fixed Overhead?
Fixed overhead refers to the portion of manufacturing overhead costs that does not change with changes in production volume within a relevant range. Examples include factory rent or lease payments, property insurance, equipment depreciation, and salaried supervisory wages. Because these costs are incurred whether a factory produces 100 or 10,000 units, they are spread across each unit produced—meaning the fixed overhead cost per unit falls as volume rises (economies of scale) and rises as volume falls. Under absorption costing (required by GAAP for external reporting), fixed overhead is included in inventory cost and only expensed through Cost of Goods Sold when the goods are sold. Under variable costing (used for internal management reporting), fixed overhead is expensed in the period incurred regardless of production levels.
Example
A factory pays $120,000 per month in fixed overhead (rent, insurance, depreciation). At 10,000 units produced, the fixed overhead per unit is $12. If production doubles to 20,000 units, fixed overhead per unit drops to $6—even though total fixed overhead remains $120,000. This leverage effect means high-volume producers can significantly undercut lower-volume competitors on per-unit cost.