Business Studies- Costs Flashcards
Why does production generate costs?
The production of goods and provision of services use up resources. For example, tyre production uses resources such as rubber, synthetic fabrics, steel bands, machinery, the factory, labour and energy. These resources represent some of the costs generated during production. Other costs will also be incurred. In this example, the selling of tyres will incur marketing , distribution and administration costs. Also, if the business has borrowed any money there will be interest to pay on the loan. For these costs, and many others, can be classified.
Costs can be classified according to….
how they behave when outputs changes.
Some production costs remain the same whatever the level of output. These are called
fixed costs.
Examples of fixed costs include
rent, business rates, advertising, insurance premiums, interest payments and research and development costs.
Production costs that do vary with output are called
variable costs
If a firm produces more output, variable costs will
increase
Similarly, if output levels are cut, variable costs will
fall.
Total costs = Fixed Costs +
Variable Costs
The amount of money a firm receives from selling its output is called
total revenue.
Total revenue = Price x
Quantity
Total revenue - Total costs=
Profit
