An Introduction to Costs
- In preparing goods/services for sale, businesses incur a range of costs
- Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity
- Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity
- These costs can be broken into different categories
- Fixed costs (FC) are costs that do not change as the level of output changes
- These have to be paid whether the output is zero or 5000
- E.g. building rent, management salaries, insurance, bank loan repayments etc
- These have to be paid whether the output is zero or 5000
-
Variable costs (VC) vary directly with the output
- These increase as output increases & vice versa
- E.g. raw material costs, wages of workers directly involved in the production
- These increase as output increases & vice versa
- Total costs (TC) are the sum of the fixed and variable costs
Sketches Which Represent the Different Types of Cost
Worked example
Fotherhill Organics Limited sold 43,539 packs of its specialist compost to mail-order customers in 2022. The cost to make and deliver each pack was £3.40. In addition, it incurred total fixed costs of £430,000
Calculate Fotherhill Organics total costs for 2022. [2]
Step 1: Calculate the total variable costs of compost
[1 mark]
Step 2: Add total variable costs to total fixed costs
[1 mark]
Sketches Which Represent the Different Types of Cost
Type of Cost |
Diagram | Explanation |
|
Fixed Cost (FC) |
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|
Variable Cost (VC) |
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Total Cost (TC) |
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