Types of Costs (DP IB Business Management)
Revision Note
An Introduction to Costs
In preparing goods/services for sale, businesses incur a range of costs
Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity
These costs can be broken into different categories
Fixed costs (FC) are costs that do not change as the level of output changes
These have to be paid whether the output is zero or 5000
Variable costs (VC) are costs that vary directly with the output
These increase as output increases & vice versa
Total costs (TC) are the sum of the fixed + variable costs
Comparison of the Types of Cost
Type of Cost | Diagram | Explanation |
---|---|---|
Fixed Cost (FC) |
| |
Variable Cost (VC) |
| |
Total Cost (TC) |
|
Direct & Indirect Costs
Direct costs are related to the production of a particular product and vary directly with output
Examples include raw materials, components and packaging
Indirect costs cannot be allocated easily to the production of a particular product
They relate to the business as a whole and are often called overheads
Examples include administration costs, salaries and rental fees
Diagram: direct and indirect Costs
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