Classification of Costs
Fixed costs
Variable costs
Total costs
Average costs
Fixed costs and variable cost
Fixed Costs
Costs that do not change with output produced or sold in the short run.
They are incurred even when the output is zero or when the firm is producing its
maximum output (capacity) and will remain the same in the short run
In the long-run they may change. Also known as overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the rent and
salary of managers.
Variable Costs
Costs that directly change with the output produced or sold.
If output increase by 50% then the variable costs will also increase by 50%
E.g.: raw material costs and wage rates that are only paid according to the output
produced.
Total cost
All the variable and fixed costs of producing the total output.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 1
, TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST ×OUTPUT
E.g. if the fixed costs of producing 2000 units of output is $3000 and the total variable
costs of producing 2000 units is $5000, then the total costs of producing 2000 units is:
$2000+$5000=$8000
Average costs is the cost of producing a single unit of output
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT
Using cost data to make simple cost-based decisions
Uses of cost data
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 on the best location: locations with the cheaper costs will be chosen
Break-even analysis
Decisions about whether to continue or stop producing a product.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 2
Fixed costs
Variable costs
Total costs
Average costs
Fixed costs and variable cost
Fixed Costs
Costs that do not change with output produced or sold in the short run.
They are incurred even when the output is zero or when the firm is producing its
maximum output (capacity) and will remain the same in the short run
In the long-run they may change. Also known as overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the rent and
salary of managers.
Variable Costs
Costs that directly change with the output produced or sold.
If output increase by 50% then the variable costs will also increase by 50%
E.g.: raw material costs and wage rates that are only paid according to the output
produced.
Total cost
All the variable and fixed costs of producing the total output.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 1
, TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST ×OUTPUT
E.g. if the fixed costs of producing 2000 units of output is $3000 and the total variable
costs of producing 2000 units is $5000, then the total costs of producing 2000 units is:
$2000+$5000=$8000
Average costs is the cost of producing a single unit of output
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT
Using cost data to make simple cost-based decisions
Uses of cost data
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 on the best location: locations with the cheaper costs will be chosen
Break-even analysis
Decisions about whether to continue or stop producing a product.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 2
