Business Costs

What are business costs?:

• Costs are amounts that a business incurs to make goods and/or provide services

Costs are important because they:

• Are the thing that drains away the profits made by a business

• Are the difference between making a good and a poor profit margin

• Are the main cause of cash flow problems in business

• Change as the output or activity of a business changes

Variable costs:

• Costs which change as output varies

Examples:

• Raw materials

• Bought-in stocks

• Wages based on hours worked or amount produced

• Marketing costs based on sales (e.g % commission)

Fixed costs:

• Costs which do not change when output varies

Examples:

• Rent and rates

• Salaries

• Advertising

• Insurance, banking and legal fees

• Software and IT services

The total costs of a business can be calculated using this formula:

Total costs(TC) = Fixed costs (FC) + Variable costs (VC)