Different Types of Business Costs
- Businesses incur a range of costs
- Examples include purchasing raw materials, paying staff salaries/wages and paying utility bills such as electricity
- These costs can be classified as follows
- Fixed costs
- Variable costs
- Total costs
- Average costs
An Explanation of the Different Costs of a Business
Type of Cost |
Diagram |
Explanation |
Fixed Cost (FC) |
|
|
Variable Cost (VC) |
|
|
Total Cost (TC) |
|
|
Average Total Cost (AC) |
|
Cost Calculations
- Based on the above definitions, we can calculate several different types of costs
Cost Calculations Using the Above Formulas Where VC is £60
Output (Q) | FC | TVC = | TC = |
0 | 200 | - | 200 |
1 | 200 | 60 | 260 |
2 | 200 | 120 | 320 |
3 | 200 | 180 | 380 |
Worked example
Aromas Cannelles manufactures luxury scented candles. The production of each candle incurs the following costs
|
|
Wax |
0.14 |
Perfume oil |
0.72 |
Loan repayment |
100 |
Glass jar |
1.46 |
Outer Packaging |
0.33 |
Calculate the variable cost in € for each candle. (2)
Step 1 - Identify the variable costs in the list
Loan repayment is classified as a fixed cost so should not be included in the calculation
Step 2 - Total the variable costs listed
0.14 + 0.72 + 1.46 + 0.33 = 2.65 (1 mark)
Step 3 - Express the answer in € per Candle
= €2.65 (2 marks for the correct answer)
Exam Tip
Take care when calculating variable costs per unit as it is likely that one or more fixed costs will be included in the list as seen above.
If you are asked to calculate the total variable costs, follow the above process and multiply the answer by the number of units produced/sold.