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 拢1000 if one item is produced and it will be 拢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 拢5 the variable cost for one cake would be 拢5 but the variable cost for ten cakes would be 拢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 拢1000 if one item is produced and it will be 拢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 拢5 the variable cost for one cake would be 拢5 but the variable cost for ten cakes would be 拢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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