Costs
Classifying costs
- fixed costs — don't change with output (rent).
- variable costs — rise and fall with output (raw materials).
- direct costs — clearly linked to one product (its materials).
- indirect costs (overheads) — not linked to one product (manager salaries).
- marginal cost — the cost of one more unit; average cost — total cost ÷ units.
Practice
Which is a fixed cost?
Fixed costs (e.g. rent) do not change with output; variable costs (materials) do.
Practice
Indirect costs (overheads) are costs that:
Overheads (e.g. manager salaries) cannot be tied to one product, unlike direct costs.
Total cost
- Total cost = fixed cost + variable cost; only the variable part rises with output.
- Cost information helps managers set prices, choose what to make, and control spending.
Practice
Fixed costs are 5,000 and variable costs are 3,000. What is the total cost (in dollars)?
Total cost = fixed + variable = 5,000 + 3,000 = 8,000.
You've got it
Key idea
- fixed (rent) vs variable (materials); direct (one product) vs indirect (overheads)
- total cost = fixed + variable; average cost = total ÷ units
- marginal cost = the cost of one extra unit