Costs

Question 1

What does cost mean?

Answer 1

The charge to a business of making a product or providing a service

Question 2

What do businesses want to know about costs?

Answer 2

• what does it cost to produce their product/service?
• what are the potential costs of potential business decisions?
• what effect would a change in costs have on a business?

Question 3

Why are costs important?

Answer 3

• they’re the things that drain away the profits made
• difference between good and poor profit margin
• main cause of cash flow problems in small businesses
• change as the activity of a business does - entrepreneur needs to know how these are likely to change

Question 4

What are the two types of cost?

Answer 4

• fixed costs: don’t change when output does
• variable costs: do change when output does

(Some fall into two categories so are semi-variable)

Question 5

What are some examples of fixed costs?

Answer 5

• research and development
• insurance
• IT
• Marketing
• consultants/advisers
• legal fees
• accounting fees
• bank charges
• rent/mortgage
• salaries

Question 6

What are some examples of variable costs?

Answer 6

• raw materials
• utilities
• distribution costs
• wages
• non price promotions
• salesman’s commission

Question 7

What are total costs?

Answer 7

The overall amount a business has to pay out to produce a product or service

Total costs = fixed costs + variable costs