Utah Contractor Practice Exam

Which of the following statements about fixed expenses is most correct?

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 indeed generally considered a fixed expense because it represents the ongoing costs associated with maintaining a business that do not fluctuate with the level of production or sales activity. Fixed expenses include items such as rent, utilities, salaries, and insurance, which need to be paid regardless of the business's operational levels. This characteristic of overhead being stable allows businesses to budget more effectively, as these costs will not change with production output. In contrast, other options suggest variations or misclassifications of expenses that do not accurately describe fixed expenses. For instance, variable expenses can change over time, while direct labor is often regarded as a variable cost since it may increase or decrease based on the volume of work. Therefore, recognizing overhead as a fixed expense is a key concept in understanding business finances and budgeting.