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Costs

Costs. AS Business Studies Operations Management . Uses of Cost Data. Information about costs is essential to making profitable decisions such as where to locate the business Marketing managers will use this information to help make pricing decisions

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Costs

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  1. Costs AS Business Studies Operations Management

  2. Uses of Cost Data • Information about costs is essential to making profitable decisions such as where to locate the business • Marketing managers will use this information to help make pricing decisions • Keeping cost records help to compare costs over time and determine the changing profitability of departments and products • Cost data can be used to set budgets which willact as targets for the future

  3. Fixed, Variable and Semi-Variable Costs Fixed Cost • A cost that does not change with changes in output Variable Cost • A cost that changes directly with changes in output Semi-variable cost • Costs that include both a fixed and semi-variable element

  4. Classify the following costs as fixed, variable or semi-variable: • Rent • Management salaries • Electricity • Piece-rate labour • Depreciation of equipment • Hire of a company car • Materials used in production • Maintenance cost of machinery

  5. Direct Costs • These costs can be clearly identified with each unit of production and vary with output Examples: • Fast Food Restaurant: Cost of Meat • Garage: Cost of the labour of the mechanic

  6. Identify one direct cost for each of these business activities: • A carpenter making a wardrobe • A brewery delivering beer to a hotel • A bank selling mortgages • A football team • An oil-fired power station

  7. Indirect Costs • These costs cannot be identified with a unit of production because they are usually associated with performing a range of tasks or a range of products Examples • Farm: Purchase of a tractor • Supermarket: Promotional expenditure • Garage: Rent

  8. Direct or Indirect Costs? • Rent • Management salaries • Electricity • Piece-rate labour • Depreciation of equipment • Hire of a company car • Materials used in production • Maintenance cost of machinery

  9. Total Cost • Total Cost = Direct Costs + Indirect Costs

  10. Calculate the total cost in the following scenario: • A business produces 150,000 units Its costs are: • Rent: $130,000 • Materials: $60 per unit • Insurance: $7000 • Management salaries: $200,000 • Labour Costs: $15 (Piece-rate) • Maintenance: $15,000 per year • What is the average cost of production?

  11. Marginal Cost • The additional cost of producing one extra unit of output Example: • If it costs $100 to produce 10 units and $110 to produce 11 units • The marginal cost of the 11th unit is $10

  12. What are the marginal costs in the following scenario:

  13. Calculate all missing costs Fixed Costs: $25,000 Variable Costs; $50

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