What are costs?

Costs

The firm incurs a variety of costs when it produces and we split these in various ways. One way is to split them into fixed costs and variable costs:

·Fixed costs - these are costs that do not vary as the level of production varies. These include such things as rent, business rates and security costs.

·Variable costs - these are costs that do vary as output varies and so will include things like raw materials, labour costs, energy costs and so on.

Another very similar way to split costs is into direct costs and indirect costs:

·Direct costs - these are similar to variable costs, and are costs that can be directly attributed to the production of each unit of the good. This will therefore be things like the cost of the raw materials, the packaging, the labour time that went into the production (if that can be clearly identified) and so on.

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·Indirect costs - these are more commonly known in practice as overheads, and are general costs that are not specifically related to the product. They may be things like marketing and distribution costs, the cost of secretarial staff, the cost of the premises (rent and so on) and general bills like phone bills.