Fixed costs and Variable costs

• What is the main topic of the video discussed in the study material?

  The concept of business costs
• Why are costs important for a business?

  They are often the reason why a business performs well or poorly in terms of profit and can cause cash flow problems
• What are the two main types of business costs mentioned?

  Variable costs and fixed costs
• How do variable costs behave as output changes?

  Variable costs change as output changes
• What happens to fixed costs when output increases?

  Fixed costs do not change in relation to output
• Can fixed costs change over time?

  Yes, fixed costs can change from one period to another
• What is a classic example of variable costs?

  Raw materials or stocks
• How can labor costs be variable?

  If staff are paid per unit produced
• What is a classic example of a variable marketing cost?

  Commission paid to salesmen
• What are some classic examples of fixed costs?

  Salaries, advertising costs, rent, and IT systems
• How do you calculate total costs?

  Total costs equal fixed costs plus variable costs
• If a business has variable costs of £75 per job and expects to do 100 jobs, what are the total variable costs?

  £7,500
• If a business has fixed costs of £25,000, what is the total cost if the variable costs are £75,000?

  £100,000
• What happens to the cost per unit as output increases when fixed costs are involved?

  The cost per unit falls as fixed costs are spread over a larger number of units
• How do fixed costs behave in relation to output compared to variable costs?

  Fixed costs do not vary with output, while variable costs do
• What are the key differences between variable costs and fixed costs?

  • Variable costs change with output (e.g., raw materials, labor per unit).
  • Fixed costs remain constant regardless of output (e.g., rent, salaries).
  • Both types of costs are essential for calculating total costs.
• How does the calculation of total costs work in a business?

  1. Identify variable costs per unit.
  2. Multiply variable costs by the number of units produced.
  3. Add fixed costs to the total variable costs.
  4. Total costs = Fixed costs + Variable costs.
• What is the distinction between limited and unlimited liability in business?

  It refers to who is liable for the debts of a business if it fails.
• Why is the concept of liability important in business?

  It determines who pays the debts if a business goes out of business owing money.
• What are the two main forms of unincorporated businesses?

  Sole traders and partnerships.
• What is the liability of owners in unincorporated businesses?

  Owners have unlimited liability for the business's actions and debts.
• What type of liability do incorporated businesses have?

  Limited liability.
• How does limited liability protect shareholders in a company?

  Shareholders are only liable for the value of their investment and not for the company's debts.
• What is the legal difference between an incorporated business and its owners?

  An incorporated business is a separate legal entity from its owners.
• What happens to a sole trader if their business fails and they owe money?

  The sole trader is personally responsible for settling the debts.
• What is a significant downside of operating as an unincorporated business?

  Unlimited liability is a significant downside and risk.
• What is the main advantage of setting up a business as a company?

  It provides limited liability protection to the owners.
• What is the implication of being a separate legal entity for a private limited company?

  The company is distinct from its shareholders, protecting them from personal liability for the company's debts.
• What are the key differences between unincorporated and incorporated businesses regarding liability?

  • Unincorporated businesses (sole traders and partnerships) have unlimited liability.
  • Owners are personally responsible for business debts.
  • Incorporated businesses (companies) have limited liability.
  • Shareholders are only liable for their investment in the company.
• What should AQA students focus on regarding business liability?

  AQA students do not need to know about partnerships.
• What should Excel students focus on regarding business liability?

  Excel students should know about sole traders and partnerships.
• Why is it important to understand the distinction between limited and unlimited liability?

  It is crucial for making informed decisions about the form of business to operate.