Cost Classification 0.0 / 5 ? Business StudiesFinancial PlanningA2/A-levelOCR Created by: MRH__98Created 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. 1 of 6 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 2 of 6 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 3 of 6 Indirect Costs A.K.A. Overheads 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 4 of 6 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. 5 of 6 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 6 of 6
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