Costs
Costs can be split into two types:
- fixed costs
- variable costs
| Fixed costs | Variable costs |
| Fixed costs are costs that do not vary with the amount produced | Variable costs are costs that vary with output |
| Items such as rent, advertising, rates and salaries are fixed costs | Items such as raw materials or electricity are variable costs |
| Example - Rent will be £1000 if one item is produced and it will be £1000 if five hundred items are produced. Fixed costs need to be paid even if there is no output | Example - If the ingredient to make one cake costs £5 the variable cost for one cake would be £5 but the variable cost for ten cakes would be £50. The more products a business manufactures the higher the variable costs will be |
| Fixed costs | Fixed costs are costs that do not vary with the amount produced |
|---|---|
| Variable costs | Variable costs are costs that vary with output |
| Fixed costs | Items such as rent, advertising, rates and salaries are fixed costs |
|---|---|
| Variable costs | Items such as raw materials or electricity are variable costs |
| Fixed costs | Example - Rent will be £1000 if one item is produced and it will be £1000 if five hundred items are produced. Fixed costs need to be paid even if there is no output |
|---|---|
| Variable costs | Example - If the ingredient to make one cake costs £5 the variable cost for one cake would be £5 but the variable cost for ten cakes would be £50. The more products a business manufactures the higher the variable costs will be |
Total costs of a business are the fixed costs added to the variable costs. A business needs to be able to pay the total costs of a business before it starts to make a profit.
A company will break-even when total costs equal total sales.
When calculating break-even it is important to understand how much of the selling price goes towards covering the company's fixed costs. This is known as the contribution.
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