Costs are expenses the company has to pay during the production of its product. There are 3 main types of costs, these are: fixed costs, variable costs, and semi-variable costs:
- Costs that don't change over a period of time and don't vary with output.
- E.g. salaries, rent, tax, insurance, heating and lighting.
- Fixed costs can also be called indirect costs as they are not directly associated with the final product.
- Fixed costs have to be paid even if the company is not producing any goods.
- Costs that vary directly with output so when output increases, variable costs also increase.
- E.g. raw materials, electricity.
- Variable costs can also be called direct costs as they are directly associated with production.
- These costs have fixed and variable elements.
- E.g. a person working for the company may have a fixed salary but may also earn commission on sales.
Total costs are calculated by adding together fixed, variable and semi-variable costs.