hi there in this short business topic video we're just going to introduce and explain briefly the concept of business costs costs you'll you'll come across everywhere as you study business because these are the amounts that a business incurs in order to operate to undertake its business for example making Goods or providing services and costs are even more important than that because they are often the reason why a business performs well or poorly in terms of profit and also they can be the reason why a business suffers from cash flow problems so it's important to understand the nature of costs as well as how they're controlled the most important distinction as you begin your study of business cost is to understand the difference between what's known as variable and fixed costs variable costs change as output changes in other words for example if output increases the variable cost per unit will mean that the total variable cost Rises two by contrast fixed costs do not change in relation to Output so if output increases by 20% normally the fixed costs would remain the same or they don't change because of that increase in output the key thing to remember is that fixed costs do change of course from one period to another the rent might change or the salaries might change but but they do not change in relation to Output as variable costs do let's just briefly look at a few examples of what we mean by variable costs the most obvious and the most popular you'll see this in all the textbooks are the raw materials or the stocks the consumables the components that are bought in in order for a business particularly manufacturers to operate but it could also be for example a retailer or a wholesaler buying infantry bringing them into the warehouse or into the store but also costs relating to labor can be variable for example if you pay your staff per unit produced that would be a cost that is variable in relation to output and similarly some marketing costs are variable in relation to the value of sales achieved and a classic example of that is a commission a percentage commission that's paid to salesman that will vary won't it if the the salesman had paid 20% commission per per salate then clearly the commission costs will vary depending on the total level of revenues achieved by contrast fixed costs as we say Do not vary with output They do change from period to period but not in relation to Output so the classic examples of fixed costs are those in relation to things like salaries advertising costs rent and rates for the office or the factory or the warehouse but also increasingly in business of course it's the it's the amount that you spend on it systems systems and software as well as other fixed costs such as insurance and fees now to calculate total costs the next important thing to remember is that total costs equal fixed costs plus variable costs so you actually have to calculate not just the fixed cost but also the total variable costs in order to understand the total cost base of a business here's a simple example on the screen there let's have a go maybe maybe have a go to freezzy the video or uh pausing the video to have a go at calculating gr's forecast total costs for March he's got variable costs per job and he's expecting to do 100 jobs the variable cost per job of £75 per job and then he has some other costs the rental rates wages advertising and other fixed costs C can you calculate his total costs well the way to do that is first of all to calculate those variable costs 75 pounds each times 100 jobs £75,000 the other costs are fixed add them all together £25,000 and as we see total costs equal variable costs plus fixed costs which is 72 plus 2 and A2 which equals £10,000 the other thing to remember of course and we'll have a look at this when we look at unit costs in a separate video is that as output increases the fixed costs are spread over a larger number of units and typically what happens there is that the cost per unit Falls so we can see from this table that fixed costs are 10,000s regardless of the level of output they do not change in relation to Output whereas variable costs do in this case it's 100 pound per unit and you can see that the effect of the fixed cost being spread over a larger number of units is shown on the right hand column there where the cost per unit Falls as output increases that's an effect of having fixed costs spread over more units there we go that's just a very brief introduction to the concept of business costs