Costs Flashcards
Fixed Costs
costs that do not vary with output produced or sold in the short run. They are incurred even when the output is 0 and will remain the same in the short run. In the long-run they may change. Also known as overhead costs.
what is overhead costs?
rent and utilities, business licenses, accounting fees, advertising expenses, and payroll
Fixed Costs examples
rent, even if production has not started, the firm still has to pay the rent.
Variable Costs
costs that directly vary with the output produced or sold.
AVERAGE COST (unit cost)
TOTAL COST/ TOTAL OUTPUT
Variable Costs examples
material costs and wage rates that are only paid according to the output produced.
examples to understand
A business can use these cost data to make different decisions. Some examples are: setting prices (if the average cost of one unit is $3, then the price would be set at $4 to make a profit of $1 on each unit), deciding whether to stop production (if the total cost exceeds the total revenue, a loss is being made, and so the production might be stopped), deciding on the best location (locations with the cheaper costs will be chosen) etc.
how to solve TOTAL COST
TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST * OUTPUT
