4.2.1 Identification & Classification of Costs IGCSE Business Studies 4.2.1 Identification & Classification of Costs

LEARNING OBJECTIVES To be able to use examples to classify costs into fixed, variable, average and total. To be able to apply understanding of costs to make informed judgments regarding production decisions

Starter – 3 minutes In pairs write down any costs that a business may have e.g. fuel, rent…

Consider…2 mins Could you create categories for any of these costs i.e. are there some costs that maybe don’t change with the amount produced? So brainstorm possible categories

Costs, revenue and profit terminology - task On scrap paper and without using references: Write out a one sentence definition (or equation) for: Fixed costs Variable costs Total cost Average cost Revenue Profit State another word that means ‘revenue’ Compare your work with a partner. Are your answers the same? Try to improve your answers

Costs, revenue and profit terminology – suggested answers Fixed costs: Costs that do not change as output changes Variable costs: Costs that change with output Average cost: The cost of producing one unit of output (total cost ÷ output) Total cost: Fixed + Variable costs Revenue: The money received from sales Profit: The excess of revenue over total costs in a given period of time (Revenue – Total Costs) Word meaning ‘revenue’: Turnover

Costs, revenue and profit other terminology Start-up costs: Costs that have to be paid when setting up a new business or expanding an existing business e.g. refitting a shop Running costs: Those paid out once a business is operating e.g. wages, rent

Task – 10 mins Categorise your examples from the starter activity Now try this Quiz ANY QUESTIONS?

Costs, revenues and profit This section is repeated and extended on the next (breakeven) presentation, in the graphical method section. You may wish to move onto that presentation now, coming back to the extension exercise at the end of this presentation if you have time. Costs, revenue and profit handling data

Costs and revenue handling data – task Bobby Stokes makes Glory™ Materials cost £2 and overheads are £1 million per month His factory has a capacity of 200,000 Glories™ Bobby sells Glory™ to wholesalers for £10 Construct a data table (maybe in excel) of his costs and revenue (FC, VC, TC, TR) for ranges of output from 0 to 200,000 units use increments of 20,000 units

Costs and revenue Output ('000) Fixed Cost ('000) Variable Cost ('000) Total Cost ('000) Total Revenue ('000)   20 40 60 80 100 120 140 160 180 200

Costs and revenue Output ('000) Fixed Cost ('000) Variable Cost ('000) Total Cost ('000) Total Revenue ('000) 1,000  1,000  0 20 40 1,040 200 80 1,080 400 60 120 1,120 600 160 1,160 800 100 1,200 240 1,240  1,200 140 280 1,280 1,400 320 1,320 1,600 180 360 1,360 1,800 2,000

Costs, revenues and profit Costs and revenues extension activity

Average costs and revenues task – 5 mins On the axis draw a line (straight or curved) to show what each type of cost would look like if plotted. Answers: Fixed cost Average fixed cost Variable cost Average variable cost Total revenue Average revenue

Average costs and revenues task – answers – fixed cost Output Sales (£) Fixed cost (graph drawn to no particular scale)

Average costs and revenues task – answers – average fixed cost Output Sales (£) Average fixed cost (graph drawn to no particular scale)

Average costs and revenues task – answers – variable cost Output Sales (£) Variable cost (graph drawn to no particular scale)

Average costs and revenues task – answers – average variable cost Output Sales (£) Average variable cost (graph drawn to no particular scale)

Average costs and revenues task – answers – total revenue Output Sales (£) Total revenue (graph drawn to no particular scale)

Average costs and revenues task – answers – average revenue Output Sales (£) Average revenue (graph drawn to no particular scale)

So… Why is it vitally important for a business to know and manage its costs? To make a profit To make a decision on selling price To know the scale needed To effectively manage different product lines To be competitive To evaluate if a product should be discontinued ANY OTHERS?