Business-Costs

An introduction to business costs

• In preparing goods and services for sale, businesses incur a range of costs

  • Some examples of these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity

• These costs can be broken into different categories:

  • Fixed costs

  • Variable costs

  • Total costs

Fixed costs

• Fixed costs are costs that do not change as the level of output changes

• Fixed costs have to be paid, even if a business does not produce any output

  • Examples include rent, management salaries, insurance and bank loan repayments

Variable costs

• Variable costs are directly linked to output

• These increase as output increases, and vice versa

  • Examples include raw material costs and the wages of workers directly involved in production and packaging

• Total variable costs at a particular level of output are calculated using the formula:

Total costs

• Total costs are the sum of the fixed and variable costs at a particular level of output

• Total costs at a particular level of output are calculated using the formula:

<img alt=”Total space costs space equals space Fixed space costs space plus space Total space variable space costs” data-mathml=”<math ><semantics><mrow><mi>Total</mi><mo>&#160;</mo><mi>costs</mi><mo>&#160;</mo><mo>=</mo><mo>&#160;</mo><mi>Fixed</mi><mo>&#160;</mo><mi>costs</mi><mo>&#160;</mo><mo>+</mo><mo>&#160;</mo><mi>Total</mi><mo>&#160;</mo><mi>variable</mi><mo>&#160;</mo><mi>costs</mi></mrow><annotation encoding=”application/vnd.wiris.mtweb-params+json”>{“fontFamily”:”Times New Roman”,”fontSize”:”18″,”autoformat”:true,”toolbar”:”<toolbar ref=’general’><tab ref=’general’><removeItem ref=’setColor’/><removeItem ref=’bold’/><removeItem ref=’italic’/><removeItem ref=’autoItalic’/><removeItem ref=’setUnicode’/><removeItem ref=’mtext’ /><removeItem ref=’rtl’/><removeItem ref=’forceLigature’/><removeItem ref=’setFontFamily’ /><removeItem ref=’setFontSize’/></tab></toolbar>”}</annotation></semantics></math>” height=”22″ role=”math” src=”data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20xmlns%3Awrs%3D%22http%3A%2F%2Fwww.wiris.com%2Fxml%2Fmathml-extension%22%20height%3D%2222%22%20width%3D%22350%22%20wrs%3Abaseline%3D%2216%22%3E%3C!–MathML%3A%20%3Cmath%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F1998%2FMath%2FMathML%22%3E%3Cmi%3ETotal%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Ecosts%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3D%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3EFixed%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Ecosts%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%2B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3ETotal%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Evariable%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Ecosts%3C%2Fmi%3E%3C%2Fmath%3E–%3E%3Cdefs%3E%3Cstyle%20type%3D%22text%2Fcss%22%3E%40font-face%7Bfont-family%3A’math1564b4c0e54101ac57a0cb68c16’%3Bsrc%3Aurl(data%3Afont%2Ftruetype%3Bcharset%3Dutf-8%3Bbase64%2CAAEAAAAMAIAAAwBAT1MvMi7iBBMAAADMAAAATmNtYXDEvmKUAAABHAAAADxjdnQgDVUNBwAAAVgAAAA6Z2x5ZoPi2VsAAAGUAAABK2hlYWQQC2qxAAACwAAAADZoaGVhCGsXSAAAAvgAAAAkaG10eE2rRkcAAAMcAAAADGxvY2EAHTwYAAADKAAAABBtYXhwBT0FPgAAAzgAAAAgbmFtZaBxlY4AAANYAAABn3Bvc3QB9wD6AAAE%2BAAAACBwcmVwa1uragAABRgAAAAUAAADSwGQAAUAAAQABAAAAAAABAAEAAAAAAAAAQEAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAACAgICAAAAAg1UADev96AAAD6ACWAAAAAAACAAEAAQAAABQAAwABAAAAFAAEACgAAAAGAAQAAQACACsAPf%2F%2FAAAAKwA9%2F%2F%2F%2F1v%2FFAAEAAAAAAAAAAAFUAywAgAEAAFYAKgJYAh4BDgEsAiwAWgGAAoAAoADUAIAAAAAAAAAAKwBVAIAAqwDVAQABKwAHAAAAAgBVAAADAAOrAAMABwAAMxEhESUhESFVAqv9qwIA%2FgADq%2FxVVQMAAAEAgABVAtUCqwALAEkBGLIMAQEUExCxAAP2sQEE9bAKPLEDBfWwCDyxBQT1sAY8sQ0D5gCxAAATELEBBuSxAQETELAFPLEDBOWxCwX1sAc8sQkE5TEwEyERMxEhFSERIxEhgAEAVQEA%2FwBV%2FwABqwEA%2FwBW%2FwABAAACAIAA6wLVAhUAAwAHAGUYAbAIELAG1LAGELAF1LAIELAB1LABELAA1LAGELAHPLAFELAEPLABELACPLAAELADPACwCBCwBtSwBhCwB9SwBxCwAdSwARCwAtSwBhCwBTywBxCwBDywARCwADywAhCwAzwxMBMhNSEdASE1gAJV%2FasCVQHAVdVVVQAAAQAAAAEAANV4zkFfDzz1AAMEAP%2F%2F%2F%2F%2FWOhNz%2F%2F%2F%2F%2F9Y6E3MAAP8gBIADqwAAAAoAAgABAAAAAAABAAAD6P9qAAAXcAAA%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%3D%3D)format(‘truetype’)%3Bfont-weight%3Anormal%3Bfont-style%3Anormal%3B%7D%3C%2Fstyle%3E%3C%2Fdefs%3E%3Ctext%20font-family%3D%22Times%20New%20Roman%22%20font-size%3D%2218%22%20text-anchor%3D%22middle%22%20x%3D%2219.5%22%20y%3D%2216%22%3ETotal%3C%2Ftext%3E%3Ctext%20font-family%3D%22Times%20New%20Roman%22%20font-size%3D%2218%22%20text-anchor%3D%22middle%22%20x%3D%2260.5%22%20y%3D%2216%22%3Ecosts%3C%2Ftext%3E%3Ctext%20font-family%3D%22math1564b4c0e54101ac57a0cb68c16%22%20font-size%3D%2216%22%20text-anchor%3D%22middle%22%20x%3D%2290.5%22%20y%3D%2216%22%3E%3D%3C%2Ftext%3E%3Ctext%20font-family%3D%22Times%20New%20Roman%22%20font-size%3D%2218%22%20text-anchor%3D%22middle%22%20x%3D%22123.5%22%20y%3D%2216%22%3EFixed%3C%2Ftext%3E%3Ctext%20font-family%3D%22Times%20New%20Roman%22%20font-size%3D%2218%22%20text-anchor%3D%22middle%22%20x%3D%22166.5%22%20y%3D%2216%22%3Ecosts%3C%2Ftext%3E%3Ctext%20font-family%3D%22math1564b4c0e54101ac57a0cb68c16%22%20font-size%3D%2216%22%20text-anchor%3D%22middle%22%20x%3D%22196.5%22%20y%3D%2216%22%3E%2B%3C%2Ftext%3E%3Ctext%20font-family%3D%22Times%20New%20Roman%22%20font-size%3D%2218%22%20text-anchor%3D%22middle%22%20x%3D%22228.5%22%20y%3D%2216%22%3ETotal%3C%2Ftext%3E%3Ctext%20font-