3.3

• Types of costs


  • Fixed
  • Variable
  • Direct
  • Indirect/overhead
• Cost


  Refers to the expenditure incurred by the business, not the actual amount paid by the customer to purchase the product from the retailer
• Price


  The sum paid by the customer to purchase a good or service
• Types of costs businesses need to pay for

  • Set-up costs
  • Running costs
• Set-up costs


  Items of expenditure needed to start a business
• Running costs


  Ongoing costs of operating the business
• Examples of set-up costs

  • Obtaining suitable premises
  • Purchasing machinery and equipment
  • Deposits paid to utilities companies
• Examples of running costs

  • Payment of wages and salaries
  • Insurance premiums
  • Costs of purchasing stocks
• Examples of set-up costs

  • Premises
  • Buildings
  • Furniture, fixtures and fittings
  • Capital equipment
  • Connection and installation of utilities
  • Legal and professional fees
  • Marketing costs
  • Initial stock of supplies
  • Recruitment costs
• Examples of running costs

  • Regular mortgage rent and/or lease payments
  • Repairs and maintenance costs
  • Payment of utilities
  • Wages, salaries and other staffing costs
• Cost refers to the cost of production (which is paid by the producer) whereas price refers to the amount the product is sold for (which is paid by the customer)
• Fixed costs


  Costs of production that a business has to pay regardless of how much it produces or sells
• Examples of fixed costs

  • Rent on leased premises
  • Interest payments on bank loans
  • Advertising expenditures
  • Market research
  • Management salaries
  • Office stationery
  • Security
  • Professional accountancy fees
• Fixed costs have to be paid even if there is no output
• Fixed costs can change, but this happens independently of the level of output
• Variable costs


  Costs of production that change in proportion with the level of output or sales
• As output increases, total variable costs (TVC) also increase
• Examples of variable costs

  • Raw material costs
  • Commission earned by sales staff
  • Hourly wages of production workers
  • Packaging costs
  • Utilities
  • Repair and maintenance
• Direct costs


  Costs specifically related to an individual project or the output of a particular product
• Indirect/overhead costs


  Costs that cannot be clearly traced to the production or sale of any single product
• Indirect costs are typically fixed costs
• Overheads are difficult to identify with a particular business activity
• Examples of fixed or variable costs

  • Rent for premises (Fixed, Direct)
  • Advertising costs (Fixed, Indirect)
  • Wages for baristas (Variable, Direct)
  • Legal expenses (Fixed, Indirect)
  • Utilities (Variable, Direct)
  • Salaries for administrative staff (Fixed, Indirect)
  • Raw materials (Variable, Direct)
  • Insurance (Fixed, Indirect)
• Revenue


  Refers to the money coming into a business, usually from the sale of goods and/or services
• Sales revenue


  The formula for calculating sales revenue is: Sales revenue = price x quantity sold
• Profit


  There is a positive difference between its revenue and cost