Categorisation of costs by behaviour and understanding of terms: direct costs, indirect costs, variable costs, semi-variable costs, fixed costs, stepped costs, marginal cost, contribution (total and per unit), break-even
Businesses classify costs by how they behave as output changes. Understanding these categories — such as fixed, variable, and marginal costs — lets you calculate contribution and find the break-even point.
Formula
Contribution per unit = Selling price − Variable cost per unit
Real World
At Domino's Pizza, the dough and toppings are direct variable costs that rise with each pizza made, while the rent on the store is a fixed cost that stays the same whether 50 or 500 pizzas are sold that day.
Exam Focus
Define each cost type with a clear example — examiners award separate marks for definition and illustration.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
How well did you know this?