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Study Notes

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 30 Jan 2019

Costs are the amounts that a business incurs in order to make goods and/or provide services.

Costs are important to business because they:

• Are the thing that drains away the profits made by a business
• Are the difference between making a good and a poor profit margin
• Are the main cause of cash flow problems in business
• Change as the output or activity of a business changes

## Fixed and Variable Costs

An important distinction needs to be made between variable and fixed costs.

Variable costs

Variable costs are costs which change as output varies.

Examples include:

• Raw materials
• Bought-in stocks
• Wages based on hours worked or amount produced Marketing costs based on sales (e.g. % commission)

Fixed costs

Fixed costs do not change in relation to output. They do change - but not as a consequence of output changing.

Examples include:

• Rent & rates
• Salaries
• Insurance, banking & legal fees
• Software Research and development

## Calculating total costs

The total costs of a business can be calculated using this formula:

Total costs (TC) = Fixed costs (FC) + Variable costs (VC)

Let’s look at a simple example of how total costs can be calculated using the following example data:

What would Graham’s costs be in March if his forecasts prove correct?

Stage 1: calculate variable costs: = £75 x 100 = £7,500

Stage 2: add together the fixed costs = £2,500 (i.e. £500 + £1,500 + £100 + £400)

Stage 3: add variable to fixed costs: total costs are £10,000 (£7,500 + £2,500)

The costs incurred by a business are often relatively easy to estimate. You know how much salary someone is paid or what price your supplier is charging. However, this is not always the case – some costs are uncertain:

• Raw materials – affected by wastage
• Product returns or refunds – affected by quality
• Where a business or entrepreneur does not have detailed experience of a market

Study Notes

### Breakeven Analysis

Teaching PowerPoints

### Introduction to Business Costs (Revision Presentation)

Teaching PowerPoints

Study Notes

Study Notes

### Cost Minimisation (Revision Presentation)

Teaching PowerPoints

Study Notes

### Diseconomies of Scale

Study Notes

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