Utah Contractor Practice Exam

Which statement is true about fixed expenses?

1. Overhead is generally considered a fixed expense

2. Fixed expenses vary over time

3. Direct labor is generally considered a fixed expense

4. Fixed expenses usually amount to less than 10% of total expenses

The correct answer is: Overhead is generally considered a fixed expense

Overhead is categorized as a fixed expense because it encompasses costs that do not fluctuate with the level of production or sales. These expenses remain consistent regardless of how much work or activity a business undertakes. Examples of overhead costs include rent, salaries of administrative staff, and utility bills. Even when a company is not actively generating revenue, these costs still need to be paid. This stability in fixed expenses allows businesses to predict their financial obligations more accurately, aiding in budgeting and financial planning. The other statements present various inaccuracies regarding fixed expenses. Fixed expenses, by definition, do not vary significantly over time; thus, the assertion that they fluctuate contradicts their fundamental characteristics. Additionally, direct labor is typically categorized as a variable expense because it often changes in direct relation to production levels. Lastly, fixed expenses can account for a more considerable proportion of total expenses, well over 10%, depending on the nature of the business and its operational structure.