Which cost is a fixed cost?

A fixed cost is an expense that does not change in total regardless of the level of activity or production volume within a relevant range. These costs are incurred even if no production occurs. The correct answer, Rent of building, is a classic example of a fixed cost because the amount paid for rent typically remains constant each period, irrespective of how many units are produced or sold in that building.

In contrast, the other options represent variable costs:

• Raw material costs fluctuate directly with the production volume; more units mean more raw materials.
• Direct labor costs also vary with production, as more labor hours are needed for higher output.
• Commission is usually a percentage of sales, making it directly proportional to sales volume.

Understanding the distinction between fixed and variable costs is crucial for cost-volume-profit analysis, budgeting, and making informed business decisions, as it impacts how costs behave with changes in activity levels.