OTHER TYPES OF COSTS Part 2. Starter What is a running cost? What is a Start-up cost? Give an...
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Transcript of OTHER TYPES OF COSTS Part 2. Starter What is a running cost? What is a Start-up cost? Give an...
OTHER TYPES OF COSTS
Part 2
Starter
What is a running cost?
What is a Start-up cost?
Give an example that could be both and explain why!
Lesson Objective
To be able to define and identify direct and indirect costs.
To be able to define and identify fixed, variable and total costs.
Huh?
As we know, costs can be divided into start-up and running costs, but they can also be classified in other ways:
Direct and indirect costs
Fixed, variable and total costs
Direct Costs
If you are making a product, the materials and wages of the person making it will be called “direct costs” because they are directly involved in making the product.
Direct Costs = the costs directly involved in making a product
Activity
Indirect Costs
As well as paying for direct costs, the business will have many other bills to pay…
E.g. costs of buying or renting property Electricity Advertising Wages of people who are not actually making the product
(cleaners, office staff…) etc.
Indirect costs = costs other than those making the product
Recap 1
1. What is a direct cost?
2. What is an indirect cost?
3. Give an example of each.
Fixed Costs
Fixed Costs = costs that remain the same no matter how many items you make or sell
E.g. rent
Variable Costs
You only pay these if you make something e.g. materials to make wooden boxes.
Activity 2
Explain using examples, the difference between fixed costs and variable costs.
Activity 3
Total Costs
This refers to the total costs of the business – which includes the fixed and variable costs.
The formula is:
Total costs = Fixed Costs + Variable costs
If a business is making no products, the total costs will be the same as the fixed costs, as these have to be paid no matter what!
Remember this for your exam!
Recap
What are fixed costs?
What are variable costs?
What is the formula for total costs?
Activity 4
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0 1000 0 1000
10 1000 500 1500
20 1000 1000 2000
30 1000 1500 2500
40
50
100
Activity 4 - answers
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0 1000 0 1000
10 1000 500 1500
20 1000 1000 2000
30 1000 1500 2500
40 1000 2000 3000
50 1000 2500 3500
100 1000 5000 6000
Activity 5
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0
10
20
30
40
Activity 5 - answers
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0 2000 0 2000
10 2000 1000 3000
20 2000 2000 4000
30 2000 3000 5000
40 2000 4000 6000
Recap 2
A quick test…
Have we met our Lesson Objective?
To be able to define and identify direct and indirect costs.
To be able to define and identify fixed, variable and total costs.
Recap
1. What is a direct cost?
2. What is an indirect cost?
3. Give an example of each.
4. What is a fixed cost?
5. What is an Variable cost?
6. Give an example of each.
7. Total cost formula?
Activity 5
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0
10
20
30
40
Fixed costs - £1500
Variable costs - £25.50 per unit
Activity 5
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0 1500 0 £1500
10 1500 £255 £1755
20 1500 £510 £2010
30 1500 £765 £2265
40 1500 £1020 £2520
Fixed costs - £1500
Variable costs - £25.50 per unit
Activity 5 - answers
Products made Fixed costs (£) Variable costs (£) Total Costs (£)
0 2000 0 2000
10 2000 1000 3000
20 2000 2000 4000
30 2000 3000 5000
40 2000 4000 6000
More practise...
