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
- Advertising
- 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
Related Collections
You might also like
From the Blog
More Study notes
Online course

Catch Up 2021A-Level Business
- 40-50 hours learning time
- 91 videos, downloads and activities
All students completing their A-Level Business qualification in 2021.
- Edexcel A-Level Business Calculation Practice Book
Edexcel A-Level Business Calculation Practice Book
- SKU: 01-4130-30090-03
Combined Print + Download Pack
Student personal license
- £6.95
Added to your Shopping Cart!
Edexcel A-Level Business Calculation Practice Book
- SKU: 01-4130-30090-03
Combined Print + Download Pack
- £6.95
- AQA A-Level Business Knowledge Book
AQA A-Level Business Knowledge Book
- SKU: 01-4130-30140-03
Printed Edition
Student personal license
- £6.95
Added to your Shopping Cart!
AQA A-Level Business Knowledge Book
- SKU: 01-4130-30140-03
Printed Edition
- £6.95
Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.