A fixed cost is a cost which can't be easily identified or related to a cost per unit or activity of any kind for example a cost which remains constant when production of a service or good within the organisation rises or falls.

Fixed cost over the long-term will generally display the characteristics of 'stepped' cost behaviour. That is the cost remains constant though only within a certain range of production. Once this range of production is exceeded, fixed cost will rise.

In the figure we can see that fixed cost line is stepped. Between zero activity and up to activity level B fixed costs are constant. At zero activity fixed costs need to be spent likebuildings and machinery in order to manufacture products.

If we were to increase our level of activity beyond level B there needs to be an increase in fixed costs and then costs are constant up to activity level D. There is another increase in fixed costs at activity D when looking beyond this point and then costs are constant again.

These sudden stepped increases in fixed costs could be because of factory reaching full capacity and then extra leasehold expenses will need to be incurred in order to attain more buildings, if production is to increase or expand further.

Another illustration is supervisor's salaries, they could be paid fixed salaries, though supervision is limited to how many workers can be supervised. Once size of the workforce exceeds a certain range another supervisor will need to be employed.