A1 Types of Costs
Costs are amounts of money that a business needs to spend in order to operate
Fixed costs do not vary with output (units produced), e.g. rent and rates, insurance, salaries
If a burger bar had a monthly rent of £2000. They would pay £2000 whether they made an sold 100 burgers or 1000 burgers. Output in this case is burgers.
Variable costs do vary with output, e.g. raw materials, components, production wages
If the same burger bar had to pay £0.20 per burger bun, They would spend £20 on buns if they made 100 burgers and £200 if they made 1000 burgers. Output in this case is burgers.
Semi-variable costs do not vary based on output until it reaches a certain level. Costs are fixed to a point at which they become variable, e.g. heat and light, telephone
The manager of the burger bar may have a telephone contract where they pay £50 per month for 1,000 minutes of calls. If their output increased from 100 to 5,000 burgers, they may find themselves spending more time on the phoe to suppliers, staff etc. This could mean they culd go over their 1,000 minutes and have to pay per minute beyond that.
Stepped costs are fixed within a range of output. If that output is exceeded, the cost will jump to a more expensive level. For example, rent is fixed for a range of output but if output increased, a business pay need to move to a larger premises which would increase their rent.
If a burger bar had a monthly rent of £2000 and output in a burger bar increased from 100 to 1000, their rent would stay fixed at £2000. However, if their output increased to 5,000, they may need to move to a larger premises. Lets say their rent increases to £3000 and their output increases to 6000. Their rent could stay fixed at 6,000 until they outgrow that premises.
Total cost is the sum of all fixed and variable costs at a level of output. The formula is fixed costs (FC) + Total variable costs (TVC)
If a burger bar sold 5,000 burgers, had variable costs of £8 per burger and monthly fixed costs of £3,500. Total costs would be £3,500 + (5,000 x £8) = £43,500.
Unit cost is the total cost to produce and sell one unit of output. This includes the variable costs for that unit and a portion of total costs. Total fixed costs and total variable costs are added together and divided by the output.
If a burger bar sold 5,000 burgers, had variable costs of £8 per burger and monthly fixed costs of £3,500. Unit costs would be (£3,500 + (5,000 x £8)) ÷ £5,000 = £8.7
