Q&A - What is meant by total costs and how are they calculated?

The total costs of a business can be calculated by simply adding together the variable costs at different levels of output to fixed costs.

The formula to use is:

Total costs (TC) = Fixed costs (FC) + variable costs (VC)

Let’s look at an example:

Graham’s van repair business has the following costs and sales output for March:
- Variable costs per job - £75
- Garage rent & rates - £500
- Wages - £1,500
- Advertising - £100
- Other fixed costs - £400
- Expected number of jobs for month - 100 jobs

What are the total costs for March?

Start with the variable costs, which equal £75 x 100 (i.e. VC per job times the number of jobs) = £7,500

Fixed costs total £2,500 (i.e. £500 + £1,500 + £100 + £400)

So total costs are £10,000 (i.e. VC + FC or £7,500 + £2,500)