Different Types of Costs | Business Studies for GCSE/IGCSE - Year 11 PDF Download

Different Types of Business Costs

• Businesses face various expenses, such as purchasing raw materials, compensating employees, and covering utility bills like electricity.
• These expenses are typically categorized as follows:
  • Fixed Costs
  • Variable Costs
  • Total Costs
  • Average Costs

An Explanation of the Different Costs of a Business

Cost Calculations

Business costs can be computed in various ways based on specific definitions.

Cost Calculations Using the Above Formulas Where VC is £60

Using Cost Data to Make Decisions

• Businesses benefit from utilizing cost data to drive their decision-making processes.

What Decisions cost data Influences

• Reducing Costs:
  • To enhance profitability, businesses often focus on reducing costs, which can be identified through accurate cost analysis.
    • Fixed costs can be minimized by relocating to more affordable premises, cutting employee salaries, reducing promotional expenses, or seeking cheaper utility providers.
    • Variable costs can be decreased by sourcing less expensive materials, purchasing raw materials in bulk, or outsourcing distribution to third-party firms.
      • For instance, many businesses opt to sell products through Amazon, which handles packaging and shipping at a lower cost than the business could manage independently.
  • However, businesses must carefully weigh the repercussions of cost reductions on customer service, quality, and delivery speed.
    • Reducing staff salaries may result in diminished customer service skills or experience among employees.
    • Using cheaper materials and components may compromise product quality.
• Price Setting:
  • Costs are integral to determining selling prices and are crucial for profit generation.
  • For instance, if the average cost of producing a cake is $3 and the business aims for a $1 profit per cake, the selling price needs to be set at $4.
• Production Decisions:
  • If production costs exceed revenue, the business will incur a loss, prompting the decision to either continue production or cease.
  • Factors influencing this decision include the product's market launch status and whether fixed costs remain payable.
• Location Selection:
  • Property expenses, whether in rent or purchase, constitute a significant monthly expenditure.
  • Businesses must evaluate location costs alongside factors like transportation accessibility, proximity to customers, and workforce availability.