U11.practice

The The CostCosts of Running a s of Running a BusinessBusiness

Adapted fromAdapted from

http://tinyurl.com/7mc2sfbhttp://tinyurl.com/7mc2sfb

Lesson ObjectivesLesson Objectives

At the end of this unit you will be At the end of this unit you will be able to:able to:

Apply the appropriate terms to the cost of Apply the appropriate terms to the cost of running a business.running a business.

Use terms correctly in determining the Use terms correctly in determining the cost of running a business.cost of running a business.

Run your rough cost analysis.Run your rough cost analysis.

Business Costs:Business Costs: There are many costs There are many costs involved in running a business, the following involved in running a business, the following

are instrumental in running a successful are instrumental in running a successful business.business.

Fixed CostsFixed Costs Variable CostsVariable Costs Total CostsTotal Costs

Fixed CostFixed Cost

A fixed cost is like a A fixed cost is like a solid brick wall that solid brick wall that has little to no change has little to no change over the years.over the years.

Fixed Cost: Cost or expense, that does not change as output changes.

Which of the following are fixed Which of the following are fixed costs of running a fruit market?costs of running a fruit market?

Building RentalBuilding RentalUtilitiesUtilitiesEmployees WagesEmployees WagesAdvertisingAdvertising

You are Correct!You are Correct!

Building rent is a great Building rent is a great example of a example of a fixed fixed costcost because it is a because it is a business cost that business cost that does not change from does not change from month to month. month to month.

You are Incorrect!You are Incorrect!

Your choice is a cost that could change Your choice is a cost that could change each month.each month.

Variable CostVariable Cost

A variable cost is like A variable cost is like a leaf in the fall that is a leaf in the fall that is always changing.always changing.

Variable Cost: Cost or expense that changes as output changes.

Which of the following are variable Which of the following are variable costs in running a fruit market?costs in running a fruit market?

Building RentBuilding RentForklift LeaseForklift LeaseDelivery Van PaymentsDelivery Van PaymentsEmployee WagesEmployee Wages

You are correct!You are correct!

Employee wages is a Employee wages is a great example of a great example of a variable costvariable cost because each month because each month you may need to hire you may need to hire new workers, lay-off new workers, lay-off workers, or pay for workers, or pay for overtime.overtime.

You are Incorrect!You are Incorrect!

Your choice is a cost that does not change Your choice is a cost that does not change from month to month, it remains constant.from month to month, it remains constant.

Total CostTotal Cost

Total cost is like the universe because it Total cost is like the universe because it encompasses everything.encompasses everything.

Total Cost: Fixed Cost + Variable Cost

Which of the following would be an Which of the following would be an example of a total cost of running example of a total cost of running

a fruit market?a fruit market?

Building Rental + Delivery Van PaymentBuilding Rental + Delivery Van PaymentFruits and Vegetables + UtilitiesFruits and Vegetables + UtilitiesEmployee wages + Building Rental Employee wages + Building Rental Utilities + Employee WagesUtilities + Employee Wages

You are Correct!You are Correct!

Employee Wages are Employee Wages are an example of a an example of a variable cost. variable cost. Building rental is an Building rental is an example of a fixed example of a fixed cost. Fixed cost + cost. Fixed cost + Variable Cost = Variable Cost = Total Total costcost

+ =

You are Incorrect!You are Incorrect!

Your choice did not include both a fixed cost Your choice did not include both a fixed cost and a variable cost.and a variable cost.

Real Life Example Real Life Example

A firm produces 125 units of a good. Its A firm produces 125 units of a good. Its variable costs are $400, and its total costs variable costs are $400, and its total costs are $700. are $700.

What do the firms fixed costs equal?

$700

$300

$400

$1100

Application To Your Student Run Application To Your Student Run BusinessBusiness

You can now list all the materials needed You can now list all the materials needed in running your business.in running your business.

You should be able to divide the You should be able to divide the necessary materials into necessary materials into Fixed CostFixed Cost and and Variable CostVariable Cost..

You should be able to apply the following You should be able to apply the following formula to determine the total cost of formula to determine the total cost of running your business: running your business: Fixed Cost (FC) Fixed Cost (FC) + Variable Cost (VC) = Total Cost (TC)+ Variable Cost (VC) = Total Cost (TC)

Congratulations You now have the

necessary information to create a cost analysis for your student run business. Apply your terminology and formulas to a spreadsheet format by clicking on the micro-soft excel icon, and creating a cost analysis spreadsheet.