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Introduction to Costs Costs are the amounts that a business incurs in order to make goods and provide services. Every business incurs costs, but they vary in terms of their type and amount. A good starting point is to consider the difference between the two main types or categories of cost, namely: Fixed costs – costs which vary with the quantity of output [no – those are variable], and Variable costs – costs which a business cannot predict because they are so uncertain [wrong] Good examples of fixed costs would include office rent, management salaries and the cost of raw materials used in the production process [no – this is a variable cost]. Of course just because a cost is classified as “fixed”, it does not mean that the cost will stay the same. A fixed cost can rise – for example if management decide to spend more on an advertising campaign, or if the percentage commission earned by the sales team is increased [this is a variable cost] Variable costs tend to be those relating directly to the production or sale of a product. Good examples include wages based on amounts produced (e.g. a piece‐rate) and the cost of buying‐in goods for resale. Total variable costs can be calculated by a simple formula: Variable cost per employee (should be “per unit”] x output