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

Is payroll considered a fixed cost?

1. True

2. False

3. Only sometimes

4. None of the above

The correct answer is: False

Payroll is categorized as a variable cost rather than a fixed cost because it can fluctuate based on the number of hours worked, overtime, bonuses, and changes in staffing levels. Fixed costs are typically expenses that do not change with the volume of goods or services produced, such as rent or salaries for permanent employees that do not fluctuate. In many businesses, payroll can be variable as it is directly related to production needs or the quantity of services provided. For example, if a business needs to ramp up production, it may hire more employees or increase hours, which would increase payroll costs. Conversely, during slow periods, payroll expenses might decrease if workers are laid off or hours are reduced. Understanding the nature of payroll as a variable cost helps businesses in budgeting and financial forecasting, as these costs can impact cash flow and operational decisions depending on market conditions and business cycles.