Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which type of cost is associated with employee salaries?

1. Fixed Cost

2. Variable Cost

3. Operational Cost

4. Sunk Cost

The correct answer is: Fixed Cost

Employee salaries are classified as fixed costs because they remain consistent regardless of the production output or business activity within a given period. Fixed costs are predictable expenses that a business must pay on a regular basis, such as rent, insurance, and salaries, even when the business is not actively generating revenue. While employee salaries can fluctuate due to bonuses or commissions, the base salary remains constant until a change is made, such as a raise or a reduction in workforce. In contrast, variable costs fluctuate based on the level of production or sales, meaning they increase or decrease as more or less output is produced. Operational costs encompass various expenses necessary for running day-to-day business activities, which can include both fixed and variable components. Sunk costs refer to past expenditures that cannot be recovered, unrelated to current or future business decisions. Understanding the nature of fixed costs is crucial for budgeting, pricing strategies, and overall financial planning in a business context.