LEARNING AIM A: Understand the costs involved in business and how businesses make a profit.

Topic A.1: Understand the costs involved in business

Types of Costs:-  Start Up Costs:- Costs that are involved in the setting up of the business & are paid before a business starts operating.  Running Costs:- Costs that are paid to keep the business running.  Variable Costs:- Costs that change depending upon how much of a product is made.  Fixed Costs:- Costs that do NOT change even when more or less of a product or service is made.

Start Up & Running Costs Decision to produce new product or provide new service Start Up Costs Running Costs Business begins trading with new product or service Costs incurred before the business can start trading Day to Day costs incurred as part of running the business

Examples of Start-up & Running Costs START UP Market Research Premises Building Alterations Fixtures & Fittings Legal Fees Furniture Equipment Communications Equipment Advertising Initial Stock Utilities & Power Insurance – first premium Production Machinery Transport / delivery materials Packaging Materials Business Stationary Licences / Permits RUNNING Owners Salary Staff Salaries Insurance Premiums Rents or lease payments Business Rates Advertising & Promotions Accountancy Fees Raw materials or Stock Utility Payments Communication charges – faxes etc. Vehicle Running Costs Loan Repayments Interests on Loans Business Stationary Packaging Postal & Distribution Charges Tax

Fixed - Costs Month 1 £300 Month 2 £300 Month 3 £300 Number of products produced DO NOT change the FIXED COSTS EXAMPLE; Electricity EXAMPLE; Electricity

Variable - Costs 1 Produced £ Produced £1, Produced £10,000 Number of products produced changes the TOTAL VARIABLE COSTS EXAMPLE; Pushchairs EXAMPLE; Pushchairs

Activity 1 : - Sorting the Costs Decide if each cost is FIXED or VARIABLE.

START UP Machinery / Equipment Furniture Computers Fixtures & Fittings Cash Register Premises Running Stock Rent & Rates Electricity & Gas Charges Insurance Materials Wages & Salaries Telephone Call Charges Motor Expenses Fixed/ Variable Fixed/ Variable FIXED OR VARIABLE?

Activity 2 : - Fill in the blanks Use either ‘Costs’ or ‘Revenue’.

1.The bigger the business size the higher the………... 2.The more a business sells the more…………… it receives 3.The more employees a business has the higher the …………… 4.The more premises a business has the higher……………

Other Costs Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product. The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

Standard Graph

Activity 3 : - Sorting the Costs AGAIN Decide if each cost is DIRECT or INDIRECT.

START UP Machinery / Equipment Furniture Computers Fixtures & Fittings Cash Register Premises Running Stock Rent & Rates Electricity & Gas Charges Insurance Materials Wages & Salaries Telephone Call Charges Motor Expenses Direct/ Indirect Direct/ Indirect DIRECT OR INDIRECT?

Activity 4 : - Sorting the Costs AGAIN AGAIN Decide if each cost is DIRECT or INDIRECT.

DIRECT OR INDIRECT? Direct/ Indirect 1.Assembly line worker 2.Manager of a paper company 3.Electricity 4.Alarm sales rep 5.Office space 6.Microscope for a chemist 7.Postage for a FedEx package