Fixed costs

Fixed (or overhead) costs – These are defined as costs which are not affected by the scale of the activities in the farm business.

They must be met in the operation of the farm.

Examples include: wages and employee on-costs, repairs, insurance, shire rates and land taxes, depreciation of plant and improvements, consultants fees, operators allowance for labour and management.

Some fixed costs (like depreciation or operator’s allowance) are not cash costs and will be estimated for inclusion in the calculation of operating profit. It is also usual to count the smaller amounts of interest paid on a typical overdraft or short term working capital as an operating expense (fixed cost) and deduct them in the calculation of operating profit. In a profit analysis, the larger amounts of interest or leases are defined as the returns to lenders of fixed capital and not as a cost. They are deducted in the calculation of net profit as non-operating expenses.