Mammoth Memory

Costs – The money that a business spends in order to make goods and/or provide services; anything that a business pays for

(Pronounced kosts)

We know what costs are when we go and buy a product at the supermarket, but if you walk into a business and ask the accountants what are the costs they will look at you bemused. You can not just say, "What are the costs," without being more precise. You need to ask for one of the following:

Variable costs
Fixed costs
Operating costs
Wage costs
Costs of sales
(or any of the following)

You need to be more specific.

ou can not just say "What are the costs," without being more precise

The two difficult costs to work out and that everyone finds hard to put into the correct category are the variable costs and fixed costs.

Variable costs – The costs that change as the business’ output changes

Examples include:

  • Raw materials (more production, more costs)
  • Hourly paid jobs (known as direct labour)
  • Commissions (no sales, no commission)
  • Utilities (more produced, more electricity being used)
  • Shipping/freight (cost of shipping varies)


Fixed costs – Costs that stay largely the same regardless of output

Examples include:

  • Rent (stays the same every month)
  • Weekly salaried employees (the weekly paid staff is the same each week)
  • Insurance (a yearly cost split into 12 equal amounts)
  • Loan repayments (usually a fixed deal for 2 years)
  • Property taxes (the same every month)
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