1. 4.2.1 Identification & Classification of Costs
IGCSE Business Studies
4.2.1 Identification & Classification of Costs

2. 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

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

4. 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

5. 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

6. 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

7. 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

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

9. 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

10. 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

11. 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

12. 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

13. Costs, revenues and profit
Costs and revenues extension activity

14. 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

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

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

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

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

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

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

21. 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?