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

  • 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
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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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