5.3 What are the costs of production?

• Economie
• Middelbare school
• havo
• Leerjaar 3

Quick review

We still need the theory we learned in the previous sections.

Just a couple questions to see if we remember it...

What are the different forms of business organisations?

The owner's equity of a corporation and a LLC consists of...

What is a balance sheet?

An example of a fixed asset is...

1. Stock of goods
2. Bank account
3. Building
4. Owner's equity

An example of a long-term debt is...

1. debtors
2. creditors
3. bank account
4. mortgage loan

5.3 What are the costs of production?

Costs

In order to keep going with your company, you have to earn enough money to pay for all the costs

• Costs of goods sold - the amount paid for the products that have been sold
• Operating costs - the sum of all other costs

Emily bought 70 shirts to sell in her new clothing shop.

1. Costs of goods sold
2. Operating costs

Justin paid the bill from the landlord, the rent of his shop was € 1200 this month

1. Costs of goods sold
2. Operating costs

Operating costs

Operating costs can be divided in two categories:

• Fixed costs - these costs are independent of output
• Variable costs - are dependent on output

Total costs (TC) =  average variable costs (AVC) x number of products sold (q) + total fixed costs (TFC)

TC = AVC x q + TFC

Fire insurance premiums are...

1. Fixed costs
2. Variable costs

Packaging material costs are...

1. Fixed costs
2. Variable costs

A company's total costs is € 250,000 when they sell 10,000 products. Variable costs are € 7.50 apiece. Calculate the fixed costs of this company.

A company's total fixed costs are €175,000. The variable costs per product are €7.50. Calculate the total costs at a production of 20,000 products.

Different types of operating costs

• Cost of labour -  the sum of all wages paid by an employer
• Housing costs - the sum of all costs related to the building
• Selling/distribution expenses - the costs related to sales and distribution

Robert gives the bank the assignment to transfer money to all employees on the 25th of each month

1. Housing costs
2. Selling/distribution costs
3. Costs of labour

Nellie pays the landlord €500 to fix a broken panel in her shop

1. Housing costs
2. Selling/distribution costs
3. Costs of labour

John wants an advertisment in the newspaper, it will cost him €75.

1. Housing costs
2. Selling/distribution costs
3. Costs of labour

Costs of interest

• Costs of interest - the amount  of interest paid on loans
• Redemption - repaying your loan

Amount of interest per year = percentage of interest x  outstanding loan

John secured a loan of €300,000 for his enterprise. He has to pay 4.5% interest a year on the outstanding loan. He has to redeem the loan in 30 equal instalments. Calculate the amount of interest John has to pay in the first year.

John secured a loan of €300,000 for his enterprise. He has to pay 4.5% interest a year on the outstanding loan. He has to redeem the loan in 30 equal instalments. How much interest does John has to pay at the end of the third year?

Depreciation costs

• Depreciation costs -  the costs of a decrease in asset value

For example: a car will lose value due to use, after a couple years it will need to be replaced

Yearly depreciation costs = (purchase value - salvage value) / estimated life

A machine with a total purchase value of €200,000 has a salvage value, after six years, of €20,000. Calculate the yearly depreciation.

Frank buys a new car for € 15,000. After five years, he sells the car for 40% of the original purchase value. The depreciation charges per annum will therefore be:

1. 1,200
2. 1,800
3. 2,000
4. 9,000

Homework

Finish the questions of section 5.3

(Q 28 - 44)