What Costs Mean in Business
Every business spends money to operate. The payments a business makes in the process of producing goods or delivering services are its costs.
The expenditure a business incurs while producing goods or services, including payments for raw materials, wages, rent, and fuel.
It helps to separate costs into two broad stages before examining their types:
One-off expenses incurred when a business is first established, such as purchasing equipment, paying legal fees, and funding initial staff training.
The ongoing expenses required to keep a business operating day to day, such as wages, rent, utilities, and raw materials. These are also called operating costs.
The distinction matters because set-up costs are a one-time financial commitment, while running costs recur indefinitely. A business that underestimates its running costs may remain profitable on paper at launch but run into cash flow problems within months.
Do not confuse cost with price. Cost refers to what the business pays to produce a good or service. Price is what the customer pays, and it typically includes a profit margin on top of costs.
Fixed Costs
Costs that remain constant regardless of the level of output produced.
A factory paying €40,000 per month in rent owes that amount whether it produces 500 units or 50,000. The rent does not respond to output. That is what makes it fixed.
Common examples include:
- Rent and lease payments on premises
- Salaries paid to permanent, salaried staff
- Insurance premiums on property or equipment
- Loan repayments on borrowed capital
Fixed costs become more efficient per unit as output rises. If a drone manufacturer incurs €5 million in fixed costs annually, each drone carries a smaller share of that burden when 70,000 are produced than when only 10,000 are. This spreading effect is one dimension of economies of scale.
In calculation questions, fixed costs stay the same across every output level in your table.
If a question gives you a new production figure, do not adjust the fixed cost figure. A common error is scaling fixed costs up with output the way variable costs behave.