IGCSE Business Costs Name: Jason Christopher Class : CS3-A SEKOLAH HARAPAN BANGSA CAMBRIDGE 2015

Content  Why the production process generate costs  The different types of costs  How to construct and interpret a break even chart

Type of costs

Fixed costs  There are some items a business must pay for whether or not it actually produces anything.  They do not change no matter how many products the business actually makes or sell.  Fixed costs may change in the long term. For example, the rent of a factory may be increased or salaries may rise following a pay increase.

Variable costs  Other costs which business incur are variable costs.  These change according to the number of products a business produces  If you add up all the fixed costs and variable costs, the business can calculate its total costs.  The formula for this is: total cost : fixed cost + variable cost

Is there a relationship between output and costs?

Calculating costs  Output is the total amount of goods or services produced by a business in a given period  Business need to be able to calculate how much it costs them to produce their output of goods and services. This called the cost of production

Average costs and marginal costs  By calculating the average costs, or unit costs, of production, a business can tell how much on average it has cost to produce one unit of output.  The formula for calculating average costs is : Average cost per unit: total costs/total output

How total costs are calculated Outputs (units) Total costs ($) Total cost ($) Fixed costs($) Variable costs ($)

Direct costs  The direct costs of a business are those costs that are directly incurred in the production process.  They include items such as the raw material and components that are used to produced goods, and the labour of the employees who actually make the goods

Indirect costs  Are all the costs of a business that are not directly incurred in the production process.  They include items such as the salaries of all other employees( including factory supervisors and managers who don’t actually make the items), rent and rates, advertising and marketing, telephone, gas and electricity, postage and other general administrative costs

A break even point  In order to decide how much to produce, a firm might use a beak even chart which will show the break even point  This is the point at which the amount of goods or services produced and sold cover the costs f production  Calculating the break even point of a product assumes that its price has two parts

Calculating the break even point of a product mathematically  The break even point of a product is the number of individual contributions required to cover the fixed costs of the business. To calculate the break even point the business must know:  The selling price per unit of product  The variable costs per unit  The total fixed costs

Calculating the break even point of a product using a break even chart  Once the fixed and variable costs of a product and the selling price per unit are known, the break even point can be plotted graphically on a break even chart. Revenue and costs quantity 0 Sales revenue Total cost Fixed costs x Variable costs

A break even chart  The line labelled fixed costs represent the fixed costs of the business, which remain constant for all volume of output  The line labelled variable costs represent the variable costs of the business, this line starts at 0 since no costs are incurred when there is no production  The line labelled total cost is the total of variable costs plus fixed costs, which rise from the fixed costs line start at the level of fixed costs  The line labelled sales revenue start at 0, since when nothing is sold there is no revenue  The point at which the total costs line and the sales revenue line intersect (X) is the break event point

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