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Name:
Date Taken:
Class:
Total Possible Marks: 29
Business Costs
Complete the following questions in the time allowed by
your teacher
QUICK DEFINITIONS
Write a short, accurate definition for each of the following key terms. (2 marks for each
good quality definition)
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1. Define: fixed costs
Answer: costs that do not vary with the level of output
2
2. Define: variable costs
Answer: costs which vary with the level of output produced
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3. Define: output
Answer: The amount or volume of production activity, usually measured in terms of units over a
time period. Basically - how much is produced
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4. Define: set-up costs
Answer: costs which are incurred as a result of setting up a new business or product, which are
not expected to continue
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5. Define: indirect costs
Answer: costs incurred in production that are not directly linked to or associated with a specific
product or activity
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QUICK LISTS
In this section, provide an outline or list points which answer the question
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6. List four examples of the kind of fixed costs that would be incurred by an
advertising agency
A. Rent & rates for the premises
B. Wages & salaries of employees (those whose pay isn’t directly linked to output)
C. Marketing costs (e.g. research, advertising)
D. Software and other IT-related costs (e.g. equipment leasing, design software)
E. Insurance, bank charges, accounting & legal fees
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7. List four examples of variable costs which are likely to be incurred by a
manufacturer of supermarket ready meals
A. Costs of raw materials and other inputs into the production process (e.g.
ingredients, energy)
B. Wages of employees where pay is directly linked to output (e.g. pay per hour or
pay per unit)
C. Marketing costs which vary based on how much is sold (e.g., promotional
discounts)
D. Distribution costs linked to how much product is shipped to customers
E. Packaging costs for finished products
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8. List three examples of costs which are typically incurred by a new business or for a
new product which doesn't continue post launch
A. Market research - e.g. focus group testing of the business idea or product
concept
B. Launch advertising
C. Recruiting the initial staff
D. Research and development
E. Company formation costs
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Short Answers
In this section, write a short answer (one or two sentences) for each question.
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9. Explain the concept of average or unit cost:
Valid points include:
Average cost (AC) or unit cost is the cost of producing one item
AC is found by dividing total costs (TC) by total output (Q)
Average costs is an indicator of efficiency or productivity
Average cost links to the concept of economies of scale - units costs often fall as
the scale of an operation increases
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10. Describe, using examples, what are meant by "overheads"
Valid points include:
Overheads are indirect costs incurred in production that cannot be directly linked to
making one particular product
Examples include: factory rent and rates; depreciation of machinery and IT
systems; warehousing costs; employment costs of admin and other support staff
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