# Cost Classification

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• Created by: MRH__98
• Created on: 17-06-16 18:59

## Fixed Costs

• Costs that don't change with output - they stay the same regardless of how much the business produces.
• Even if the business doesn't produce anything at all, it still has to pay its fixed costs.

Examples include:

• Rent on business premises
• Senior managers' salaries
• The cost of new machinery.
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## Variable costs

• Variable costs change depending on output.
• If output increases, variable costs increase.
• If output falls, variable costs fall.

Examples include:

• Hourly wages of staff
• The cost of raw materials
• The cost of packaging
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## Direct Costs

• Direct costs are costs that are directly linked to producing products or providing services.
• Direct costs are almost always variable.

Examples include:

• The cost of raw materials
• The hourly wages of the staff who make the products / provide the service
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## Indirect Costs

• Costs that are not directly related to the production of goods or provision of services.
• Indirect costs are almost always fixed.

Examples include:

• Business rates and rent
• The wages and salaries of staff who work for the company but aren't directly involved in making the product
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## Marginal Cost

• The cost of producing one additional (extra) good.
• e.g. Fixed costs = £100,000     Variable costs = £10 per unit
• Fixed costs of 200 units = £100,000
• Variable costs of 201 units = (£10 x 201 = £2,010)
• Marginal cost = £102,010
• As fixed costs do not change, the marginal cost is the increase in variable costs, which is £10.
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## Average Cost

• Average cost is the cost per unit of production.
• A.K.A. The Unit Cost.
• Average Cost = Total Cost / Output
• Or: Average Cost = (Total Fixed Cost + Total Variable Cost) / Output
• Average Fixed Cost = Total Fixed Cost / Output
• Average Variable Cost = Total Variable Cost / Output
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