Entrepreneurship and Small Business (ESB) Certification Practice Exam

Insurance is an example of which type of cost?

1. Variable cost

2. Fixed cost

3. Operational cost

4. Surplus cost

The correct answer is: Fixed cost

Insurance is categorized as a fixed cost because it typically represents a consistent and unchanging expense that a business incurs over time, regardless of the level of goods or services produced. Fixed costs, like insurance premiums, remain constant irrespective of business activity levels, meaning they do not fluctuate with production output or sales volume. Businesses typically pay insurance annually or on a set schedule, and these payments must be made regardless of the company's financial performance in a given month or quarter. This predictable nature helps companies in financial planning and budgeting. In contrast, variable costs change with production levels, operational costs represent the costs associated with running day-to-day activities, and surplus costs aren't a recognized category in standard accounting terminology. Understanding how insurance fits into cost structures allows businesses to better manage their financial commitments and operational strategies.