Basic financial terms
A cost is anything that a business has to pay for. All business have costs that need to be paid regularly. Examples of costs for a business include rent, bills, and raw materials, staffing costs, petrol and postage.
Costs are split into three main categories, fixed, variable, and total costs.
Fixed costs are costs for a business that do not change, no matter what the level of output for the business. They are usually fixed for at least a year and mean that a business will pay the same amount each week, month or year.
Examples of fixed costs include:
- rent
- insurance
- salaries of staff
Variable costs are costs that change depending on the output of a business. These costs are dependent on how much the business produces or sells. Generally if the business is producing or selling more, these costs will rise. If the business is producing or selling less, these costs will fall.
Examples of variable costs include:
- petrol
- postage
- raw materials
- wages (staff paid per hour)
Total costs are simply just fixed and variable costs for the business added together, giving the total overall costs for the business. The calculation for total costs is:
Total costs = fixed costs + variable costs
For example if a business have fixed costs of £18,500 and variable costs of £9,250 their total costs would be £18,500 + £9,250 = £27,750.
