Learning Objectives

- Identify the difference between the differing types of costs

- Identify the different types of revenue

- Explain the importance of costs, revenue and profit for a business

Starter

_____________ - ______________

= PROFIT!

Covering the costs of a new product or service

Types of costs 1

Start-up costs: Are payments made before, or soon after, the start

of a project Occur only once May be quite high

(eg for a new building)

Examples of start-up costs

New building or extension to existing building New machines, including installation Office equipment, including ICT Market research and advertising Initial stocks of materials Installation of gas, electricity, telephone lines New vehicles

Types of costs 2

Running costs: These begin once the project has started They arise on a regular basis Must be paid for as long as the project lasts

Examples of running costs

Wages and salaries Heating and electricity Repairs and maintenance Business rent and rates Materials and stationery Telephone Advertising Vehicle running costs (eg diesel fuel)

Warning!

Stock (initial stock = start-up; regular stock = running)

Advertising (initial adverts = start-up; regular adverts = running)

Some types of costs can be both start-up and running costs, eg

Key questions to ask

Is the bill paid once only? If so, cost is a start-up cost.

Is the bill paid regularly? If so, cost is a running cost.

Importance of costs

Questions:

Why is it important to know your start

up and running costs?

Why is it important to reduce costs?

The basics of break-evenThere are two types of costs:

Variable costs increase by a step every time an extra product is sold (eg cost of ice cream cornets in ice cream shop)

Fixed costs have to be paid even if no products are sold (eg rent of ice cream shop)

Examples of variable costs

Variable costs increase with the amount of production

Raw materials Petrol Labour (paid by the hour) Packaging

Example of Variable Costs

One product costs £1 to produce

£1

£4

£3

£2

Cos

ts o

f pr

oduc

tion

Production level

1 2 3 4

Examples of Fixed Costs

Fixed costs remain the same no matter the production level

Rent Business rates (tax on businesses) Salary based employee wages Insurance

Example of Fixed Costs

£100

£400

£300

£200

Cos

ts o

f pr

oduc

tion

Production level

1 2 3 4

Assessment Slides

Write a powerpoint that examines all that you have learnt today include examples (inc pics) for each of the following:

Start up costs Running costs

Choose a Business

Develop a powerpoint for a new business venture that you wish to setup.

Price and identify: Fixed costs Variable costs of your product/service Start up costs Running costs

Sales Revenue

Revenue = selling price x quantity sold

i.e – if a product is sold for £15 and sells 10 units then it will bring in £150

£15 x 10 = £150