finance Costs

What you will learn In today’s lesson you will learn about: The different types of costs What these look like when plotted on a graph Why businesses need to know about costs

Variable costs Costs are anything that a firm has to spend its money on Variable costs are costs which change as a business produces more or less Examples of variable costs include wages and raw materials As a business produces more it will have to employ more workers and therefore pay more wages Likewise if a restaurant became more popular and sold more meals, it would have to use more ingredients for the meals, i.e. the cost of its raw materials would increase

Fixed costs Fixed costs are costs which stay the same as a business produces more or less Examples include rent and salary Businesses have to pay rent on their premises regardless of how much business they do As far as workers who are on salaries are concerned, the business pays them this amount regardless of the output of the business

exercise From the list below write which are fixed and which are variable costs: Rent, wages, electricity, gas, stock, raw materials, advertising, petrol, car tax, internet rental,

Fixed costs Rent Car tax Internet rental Variable costs Wages Electricity Gas Stock Raw materials petrol

Total costs Total costs are calculated by adding fixed and variable costs together total costs = fixed costs + variable costs

Drawing cost curves for your business “Once the table is complete the fifth task is to plot your data on a graph and draw variable, total and fixed cost curves for your business. (Use the graph paper provided)”

Drawing cost diagrams To do this we must plot the value of a businesses’ costs against output, then we obtain series of cost curves i.e. You need to know how much is produced or sold in your business You also need to know how much your costs will change as your sales increase – this is known as a cost schedule In business before you started trading you would title estimate this by carrying out market research Later on we will do this, but for now here’s the information you would need to gather

Cost schedule outputFixed costVariable costsTotal cost

Drawing Cost curves From the cost schedule the various cost curves for the business can be drawn These curves are normally drawn as straight lines for simplicity Plot costs on the vertical axis and output on the horizontal axis Use your graph paper to do this You need to fill in the gaps on the cost schedule table first

Fixed costs Costs (£) output Fixed cost The fixed cost curve is a horizontal straight line and begins at the cost axis at the value of the fixed costs of the business 15

Variable costs Costs(£) Variable cost curve output The variable cost curves is drawn as a straight line for simplicity and slopes upwards from the origin, demonstrating that as output rises, variable costs also rise (and vice versa). 50

Total costs Costs (£) output Total cost Fixed cost The total cost line slopes upwards from the cost axis at the point where the fixed cost line starts. This demonstrates that the total cost curve consists of the fixed cost and variable costs added together. Total costs increase as output increases and vice versa

Why do firms need to know about costs ? Helps the firm to decide what price to set Most firms will set a price which covers their costs and makes a small amount of profit on top (known as cost plus pricing) Firms will need to monitor costs to ensure that profits do not fall Allows them to calculate their break even point (discussed later)

What you have learnt In today’s lesson you have learnt about: The different types of costs How to draw a cost schedule for a business What the cost curves of a business look like when plotted on a graph Why businesses need to know about costs