Future Business Leaders of America (FBLA) Business Calculations Practice Test

Which of the following expenses is considered a fixed cost in a business?

1. Utilities

2. Salaries

3. Raw materials

4. Advertising

The correct answer is: Salaries

Salaries are categorized as fixed costs because they represent consistent, predictable expenses that do not fluctuate with the level of production or sales within a business. The salaries paid to employees are typically agreed upon in advance and remain constant over a specific period, regardless of how much or how little the company produces or sells. In contrast, utilities, raw materials, and advertising costs are generally considered variable or discretionary costs. Utility expenses can change based on usage and operational demands, raw materials costs depend on production volumes and market prices, and advertising expenditures can vary according to marketing strategies and budget allocations. Understanding the distinction between fixed and variable costs is critical for businesses when budgeting, forecasting, and analyzing financial performance. This concept helps in making informed decisions regarding cost control and profitability.