Which statement about fixed expenses is most correct?

Which statement about fixed expenses is most correct?

• A. Overhead Is Generally Considered a Fixed Expense
• B. Overhead Fluctuates With Production Levels
• C. Direct Labor Is a Fixed Expense
• D. Taxes Are Never Fixed Expenses

Answer: (A)

Fixed expenses are costs that stay the same regardless of how much work you do, at least within a normal operating range. For a landscaping contractor, overhead includes things like office rent, insurance, depreciation on equipment, and salaries for non-billable staff. These costs must be paid to keep the business running, whether you mow one lawn or fifty, so they’re generally treated as fixed. The statement that overhead fluctuates with production level isn’t describing fixed costs accurately; that would be closer to variable costs. Direct labor is typically variable because it changes with how much work you’re performing, not a constant cost independent of activity. And taxes aren’t universally fixed or never fixed—some taxes are fixed (like certain license or property taxes), while others vary with business activity or income. So the best characterization is that overhead is generally a fixed expense.

Fixed expenses are costs that stay the same regardless of how much work you do, at least within a normal operating range. For a landscaping contractor, overhead includes things like office rent, insurance, depreciation on equipment, and salaries for non-billable staff. These costs must be paid to keep the business running, whether you mow one lawn or fifty, so they’re generally treated as fixed.

The statement that overhead fluctuates with production level isn’t describing fixed costs accurately; that would be closer to variable costs. Direct labor is typically variable because it changes with how much work you’re performing, not a constant cost independent of activity. And taxes aren’t universally fixed or never fixed—some taxes are fixed (like certain license or property taxes), while others vary with business activity or income. So the best characterization is that overhead is generally a fixed expense.