Understanding total costs

Time2Resources

29 Mar 202005:12

Summary

TLDRIn this educational video, Helen Cooper Smith from Time to Resources explains the concept of total costs for businesses, emphasizing the need for total revenue to exceed these costs to achieve profit. Total costs are comprised of fixed costs, which remain constant regardless of output level, and variable costs, which increase with output. The video uses the example of a wicker chair business to illustrate how to calculate total costs and break-even points, highlighting the importance of understanding these costs for business profitability.

Takeaways

💡 Profitability is a business objective, and it's achieved when total revenue exceeds total costs.
🔢 Total costs encompass both fixed and variable costs, which are essential to monitor and control for business success.
🏢 Fixed costs are expenses that remain constant regardless of the level of output, such as rent and salaries.
🔄 Variable costs change with the level of output, including costs for raw materials, packaging, and components.
📏 The formula for calculating total costs is Total Cost (TC) = Fixed Costs (FC) + Total Variable Costs (TVC).
📊 To determine total variable cost, multiply the variable cost per unit by the number of units produced.
📈 A graph can visually represent total costs, with fixed costs as a horizontal line and variable costs as an upward-sloping line.
📉 Fixed costs are shown as a horizontal line on the graph, indicating they do not change with output levels.
📈 Variable costs are represented by a line that starts at zero and slopes upwards, reflecting their increase with output.
💼 Understanding total costs is crucial for determining profit or loss and for calculating the break-even point.
📢 The video emphasizes the importance of fixed and variable costs in business financial planning and analysis.

Q & A

What is the primary objective of a business in terms of profit?
-The primary objective of a business in terms of profit is to ensure that total revenue is higher than total costs.
Why is it crucial for businesses to monitor and control total costs?
-Monitoring and controlling total costs is crucial for businesses to manage expenses effectively and ensure profitability.
What are the two components that make up total costs in a business?
-Total costs in a business are made up of fixed costs and variable costs.
Do fixed costs change with the level of output? If not, what are some examples of fixed costs?
-Fixed costs do not change with the level of output. Examples include rent for a shop or factory, salaries of managers, utilities like gas, electricity, and water, loan repayments, and insurance.
How do variable costs differ from fixed costs in relation to output levels?
-Variable costs vary with the level of output, increasing as output increases. They include costs for raw materials, packaging, and components involved in making a product or producing a service.
What is the formula for calculating total variable cost?
-The formula for calculating total variable cost is variable cost per unit multiplied by the output, i.e., the number of units being produced.
How is total cost calculated in a business?
-Total cost is calculated by adding fixed costs to total variable costs, represented by the formula TC = FC + TVC.
In the example given, what are the fixed costs for the wicker chair business?
-In the example, the fixed costs for the wicker chair business are one hundred thousand pounds.
How much is the variable cost per unit for the wicker chair business, and how does it affect total variable costs with different levels of output?
-The variable cost per unit for the wicker chair business is 50 pounds. As the level of output increases, the total variable costs also increase proportionally.
What is the significance of total costs in determining a business's profitability?
-Total costs are significant in determining a business's profitability as they are used to calculate profit or loss and to determine the break-even point.
How can the relationship between total costs and output be visually represented?
-The relationship between total costs and output can be visually represented on a graph with costs on the vertical axis and output on the horizontal axis, showing fixed costs as a horizontal line and total variable costs as a line that slopes upwards.

Outlines

00:00

💼 Understanding Total Costs for Business Profitability

Helen Cooper Smith from Time to Resources introduces the concept of total costs, emphasizing its importance for businesses aiming to make a profit. Total revenue must exceed total costs for profitability. Total costs encompass fixed and variable costs. Fixed costs, such as rent and salaries, remain constant regardless of output levels. Variable costs, which include raw materials and packaging, change with output levels. The total variable cost is calculated by multiplying the variable cost per unit by the number of units produced. An example using a wicker chair business illustrates how fixed costs of £100,000 and variable costs of £50 per unit result in a total cost calculation. The video guides viewers to calculate total costs for different output levels and visually represents these costs on a graph, highlighting the fixed cost line and the variable cost line. The importance of understanding total costs for determining profit or loss and calculating the break-even point is also discussed.

05:04

🔍 Recap of Total Costs Concept

This paragraph serves as a recap, summarizing the key points from the video. It reiterates that profit is calculated as total revenue minus total costs, with total costs being the sum of fixed and variable costs. The video concludes by encouraging viewers to subscribe to the Time to Resources YouTube channel for more informative content on related topics.

Mindmap

Keywords

💡Total Costs

Total Costs refer to the overall expenses incurred by a business in its operations. It encompasses both fixed and variable costs. In the video, Helen Cooper Smith explains that total costs are crucial for a business to make a profit, as they must be lower than the total revenue. The script uses the example of a business making wicker chairs, where total costs are calculated by adding fixed costs of £100,000 to the variable costs of £50 per unit, resulting in a total cost of £125,000 for 500 units produced.

💡Fixed Costs

Fixed Costs are expenses that a business must pay regardless of the level of production or sales. They do not change with the number of units produced or sold. In the context of the video, fixed costs include rent for a shop or factory, salaries of managers, utilities, loan repayments, and insurance. The script illustrates this with the example that even if a business produces zero output, it still has to pay its fixed costs of £100,000.

💡Variable Costs

Variable Costs are expenses that fluctuate with the level of production or sales. As output increases, variable costs also increase. These typically include costs of raw materials, packaging, and components. The video script uses the example of a wicker chair business where each chair has a variable cost of £50, which goes into the materials for making the chair. As the output increases, the total variable cost increases proportionally.

💡Total Revenue

Total Revenue is the income generated from the sale of goods or services. It is a key financial metric that businesses use to measure their financial performance. The video emphasizes that for a business to make a profit, total revenue must exceed total costs. Although not explicitly detailed in the script, total revenue is implicitly contrasted with total costs to explain the concept of profit.

💡Profit

Profit is the financial gain that a business makes after deducting all its expenses from its total revenue. It is a measure of a business's success and efficiency. The video script mentions that profit is calculated as total revenue minus total costs, indicating that understanding and controlling total costs are essential for a business to be profitable.

💡Break-even Point

The Break-even Point is the level of sales at which a business's total revenue equals its total costs, meaning it is neither making a profit nor incurring a loss. The video script suggests that understanding total costs helps in calculating the break-even point, which is a critical analysis tool for businesses to determine the volume of sales needed to cover their costs.

💡Output

Output refers to the quantity of goods or services produced by a business. In the video, output is used to demonstrate how variable costs change with the level of production. For example, as the output of wicker chairs increases from 0 to 500 units, the total variable cost increases from £0 to £25,000.

💡Cost Control

Cost Control is the process of monitoring and managing a business's expenses to ensure they are kept within budget and are efficient. The video script highlights the importance of controlling and monitoring total costs for a business to achieve its profit objectives.

💡Total Variable Cost

Total Variable Cost is the sum of all variable costs associated with producing a certain quantity of goods or services. It is calculated by multiplying the variable cost per unit by the number of units produced. In the video, this is exemplified by the calculation of total variable cost for 500 wicker chairs, which is £50 per unit multiplied by 500 units, resulting in £25,000.

💡Formula

In the context of the video, a formula is a mathematical equation used to calculate specific financial metrics. The script provides the formula for calculating total costs as T.C. = F.C. + T.V.C., where T.C. stands for Total Costs, F.C. for Fixed Costs, and T.V.C. for Total Variable Costs. This formula is central to understanding how a business computes its overall expenses.

💡Graph

A Graph is a visual representation of data used to analyze and display information. The video script describes how to graphically represent total costs by plotting fixed costs as a horizontal line and variable costs as a line that slopes upwards, starting from the origin. The total cost is then shown as a combined line that starts at the fixed cost level and increases with output, illustrating the relationship between costs and output visually.

Highlights

Total revenue must be higher than total cost for a business to make a profit.

Businesses need to control and monitor total costs, which include fixed and variable costs.

Fixed costs do not vary with the level of output and include rent, salaries, utilities, and insurance.

Variable costs change with output levels and include raw materials, packaging, and components.

Total variable cost is calculated by multiplying the variable cost per unit by the output quantity.

Total costs are calculated by adding fixed costs to total variable costs.

An example using a business that makes wicker chairs is provided to illustrate cost calculations.

Fixed costs remain the same regardless of output, even if it's zero.

As output increases, total variable costs increase accordingly.

Total costs are represented graphically with fixed costs as a horizontal line and variable costs as a sloped line.

The total cost line on the graph is created by shifting the variable cost line upwards to start at the fixed cost point.

Total costs are crucial for calculating business profit or loss and determining the break-even point.

Profit is calculated as total revenue minus total costs.

The formula for total cost is fixed costs plus total variable costs.

Fixed costs are exemplified by rent, while variable costs are exemplified by raw materials.

The video concludes with a call to action to subscribe to the Time to Resources YouTube channel for more business insights.