• All business activities involve costs of some sort.

These costs cannot

be ignored.
WHY do we need to think about costs?
• The costs of operating the business can be compared with the
revenue ,to calculate whether or not the business will make a profit or
loss.
• The costs of two different locations for the new business can be
compared.
• To make pricing decisions
Fixed costs and variable costs
• Fixed cost: does not change with the output
• Eg: management salaries and rent paid for property.
Even if output was zero, these costs would still have to
be paid.
• Variable cost:

• Examples of variable costs include material costs and

piece-rate labour costs.
• The more units that are produced, the higher these
variable costs will be.
Average cost
• This is the cost of producing one output

• Average cost = Total cost / no of output

Study tips
Avoid making this mistake: ‘Fixed costs do not vary over time’.
This is not true because a business might expand by building a new
shop, factory or offices.

Fixed costs are those that do not vary with the output of the business,
given the existing factory, shop or office buildings.
TOTAL COST
• Total cost= fixed cost + variable cost

OR
Total cost= average cost x no of output
How can cost calculation help business?
• If the average cost per unit is not known, the business could charge a
price that leads to a loss being made on each item sold.

• Deciding whether to stop production or continue

• Deciding on the best location

Economies of scale