T OPIC A.1 U NDERSTAND THE COSTS INVOLVED IN BUSINESS Identify 1 item from your desk, pencil case or bag. Draw a spider diagram to show: all the costs that would have been incurred when making this item all the costs incurred when selling this item

T OPIC A.1 U NDERSTAND THE COSTS INVOLVED IN BUSINESS By the end of this topic you will: Be able to understand and identify costs of a business Understand, define and identify different types of costs Calculate total costs Is it true? Does money make the world go round? How many other songs can you think of with money as a theme? You will need a calculator.

C OSTS Costs are the expenses incurred by a business The money goes out of the business to pay for goods and services Examples of costs include: Materials Equipment Wages Marketing Utilities e.g. heat and light, power etc Transport Loan repayments

Q UESTION TIME 1 MARK Belinda makes tailor made wedding cakes. Which one of these is not a cost? Ingredients Electricity Customer orders Newspaper advertisement Can you justify your answer?

I DENTIFY BUSINESS COSTS Start-up costs The costs incurred when first setting up a business Examples include: Buying equipment Decorating premises Introductory marketing Legal fees Operating (running) costs The costs incurred in the day-to-day running of a business Examples include: Buying stock Utility bills Staff wages Ongoing advertising

B URT IS PLANNING TO SET UP A WINDOW CLEANING BUSINESS SERVICING BOTH HOUSES AND OFFICES IN HIS LOCAL AREA What are Burt’s operating costs? What are Burt’s start- up costs?

L UIGI IS OPENING A NEW PIZZA TAKE AWAY AND DELIVERY SHOP. H ERE ARE SOME OF HIS COSTS. Which of these are start-up costs and which are running costs ? Start-up costsRunning costs Buying a delivery moped Wages for delivery staff Fuel for moped Pizza ingredients Pizza ovens and kitchen fittings Luigi’s wages Lighting the shop Flyers to advertise the opening Can you state one other start-up cost and one other running cost?

F IXED AND V ARIABLE C OSTS Fixed Costs Those costs that do not vary with the amount of business activity i.e. numbers sold or produced These include Rent Salaries Machinery Variable Costs Those costs that do vary with the amount of business activity As more is produced or sold costs will rise These include Raw Materials Wages Commission on sales One way of defining costs is fixed and variable.

F IXED COSTS AND VARIABLE COSTS Can you explain the difference between a wage and a salary? Why are salaries a fixed cost and wages a variable cost?

C ALCULATING F IXED AND V ARIABLE C OSTS Fixed costs stay the same regardless of output therefore a fixed cost of £12000 is £12000 if you produce 0 items or 1500 items The fixed costs of a restaurant include rent, tables, chairs, ovens, manager, menus, place settings etc. These costs stay the same regardless of the number of customers Can you fill in the fixed costs row on the table? Customers Fixed Costs

C ALCULATING F IXED AND V ARIABLE C OSTS Variable costs change with the amount of output. If the cost per unit is £5 then if there is 0 output the variable cost will be _, if 1000 units then variable cost will be £5000 The variable costs of a restaurant would include food ingredients, drinks, number of waiting staff Can you fill in the missing variable costs? Customers Variable Costs (£5 per customer) customers x £5 = £5000

C ALCULATING T OTAL C OSTS Total Cost is calculated by adding together both the Fixed and Variable Costs An entrepreneur who failed to recognise the importance of both costs would soon experience difficulties Total Cost = Fixed Cost + Total Variable Cost Can you fill in the total costs row? Customers Fixed Costs Variable Costs Total Costs

C ALCULATING T OTAL C OSTS A business has fixed costs of £300 Its variable costs are £6 per unit produced Complete the table below to show total costs at different levels of output Units Fixed Costs Variable Costs Total Costs

T OTAL COSTS In the examination you will need to know the formula for total cost Total costs = fixed costs + variable costs

30 S ECOND T EST End What is the formula for total costs?

Q UESTION TIME 4 MARKS Rowena plans to start selling children’s hoodies on a market stall. She has forecast that her monthly costs if she sells 200 hoodies would be: A variable cost of £6 for each hoodie sold Total fixed costs of £1800 (a) Complete the table using this information. (3 marks) (b) What would the fixed cost be if Rowena sold 100 hoodies? (1 mark) 200 hoodies Variable costs£ Fixed costs£ Total costs£

C OSTS CAN ALSO BE CLASSIFIED AS : Direct costs The costs that can be directly linked to the production of a good or service Examples include: Raw materials to make a good Labour to supply a service Power used to run a machine Indirect costs The costs that a business incurs but cannot be easily linked to the production of a specific good or service Examples include: Wages of administrative staff Window display in a shop Rent on premises

2 M INUTE T EST State 1 example of a start-up cost State 1 example of a running cost State 1 example of a fixed cost State 1 example of a variable cost Write down the formula for total costs End

T OPIC A.1 U NDERSTAND THE COSTS INVOLVED IN BUSINESS You have now completed this topic, are you able to? Understand and identify costs of a business including: Start-up costs Operating costs Understand, define and identify different types of costs Fixed and variable Direct and indirect Calculate total costs Try the test yourself quiz number 1