LESSON PREPARATION GUIDE

LINKS WITH PREVIOUS LESSON: LINKS WITH NEXT LESSON(S):

❖ Use of recycled materials ❖ Budget for Entrepreneur’s Day
CONTENT: KEY TERMS (VOCABULARY):
❖ Simple cost calculation – Variable cost; fixed cost; Total cost; Unit Variable costs, Fixed costs, Total cost, Selling price
cost; selling price; Mark-up.
LEARNERS DO THIS ACTIVITY AFTER THE LESSON ON SIMPLE COST
INFORMAL ASSESSMENT: WORKSHEET 11
CALCULATIONS
INTRODUCTION

Ask the following questions to your learners.

Q: Do you still remember the definition of cost price?
A: Cost price is the price that it costs to make or buy a product
Q: Do you still remember the definition of mark up?
A: Mark up is the amount of money added to the cost price of goods to cover expenses and work out the selling price.
Q: What are expenses (meaning with examples)?
A: Payments made for the running of the business. Examples are:
• Rent; Water and electricity; Wages; Telephone; Transport; Insurance; Advertising etc.
Q: You learnt about how to calculate selling price. Do you still remember the method or formula of calculating the selling price?
If the cost price of one loaf of bread is R4.00 and the mark up is 50%. Calculate the selling price of one loaf of bread.
ANSWER:
Cost price per unit + Percentage mark up = Selling price

R4.00 + R4.00 x 50% =

R500 + R2.00 = R 7.00
Explain the following to the learners as you write on the board.
1. Variable costs
• Some of the business expenses are directly linked to the production of goods and services.
• When the production of goods and services increases these expenses also increase.
• When the number of goods produced decreases these expenses also decrease.
• Variable costs are expenses that change every month depending on the number of items that were produced and the business that was done.
• The following expenses or costs will always increase and decrease with the number of items or goods that are produced.
Stock or raw materials You will buy more stock when customers want to buy more goods. So, the cost of stock or raw materials will
increase with the demand for more goods.
Water and electricity More electricity will be used to produce more goods and the cost will also increase.
Telephone When you do more business telephone usage will also increase. To call customers, suppliers, and other partners.
Fuel / Petrol / Transport More money will be used for transport or petrol when business sales increase.
Packaging Packaging costs will increase with the increasing number of items produced

2. Fixed costs
Fixed costs stay the same no matter how many products are made or sold. For example, rent still has to be paid whether the business makes one
trousers, 1000 trousers, even if there is no production. The same goes to insurance, advertising, salaries and loan payments.

➢ Wages paid to workers for their regular hours is a fixed cost. Any extra time / overtime they spend on the job is a variable cost.

➢ Total cost in a business (Total Expenditure for a specific period, for example: A month) is obtained by adding Variable costs with Fixed costs. The
method or formula is:
➢ Total cost = variable costs + fixed costs
➢ An example of variable costs of making a trouser
Variable costs 1 Trouser 10 Trousers Reason: Ask learners to give reasons for the increase in costs.
Fabric R 28.00 R280.00 More fabric is purchase / bought
Thread 0.80 8.00 More thread will cost more money
1 zip 4.00 40.00 More zips will cost more money
Packaging 0.70 7.00 More packaging material will cost more money
Total
➢ An example of fixed costs of making a pair of trousers.

Fixed costs 1 Trouser 10 Trousers Reasons for no increase

Rent R 3500.00 R3500.00 Money paid for rent is not affected by how many goods the business produces.
Insurance R150.00 R150.00 Money paid on Insurance is not affected by how many goods the business
produces.
Wages 13.00 R 13.00 More workers will cost more wages
Total

➢ Ask learners calculate the variable costs of producing one pair of trousers.
➢ The answer will be as follows:

Variable costs One Trouser

Fabric R 28.00
Thread 0.80
1 zip 4.00
Packaging 0.70
Total variable cost R 33.50

➢ Ask learners calculate the variable costs of producing ten pairs of trousers.
➢ The answer will be as follows:

Variable costs 10 Trousers

Fabric R280.00
Thread 8.00
1 zip 40.00
Packaging 7.00
Total variable cost R 335
 ➢ Variable cost for one pair of trousers is R46.50
➢ Variable cost for ten pairs of trousers is R465.00
➢ It means therefore that variable costs increase with the number of items produced or sold.
➢ Whereas the fixed costs of producing one pair of trousers and ten pairs of trousers stays the same.

Fixed costs One pair of Trousers Ten pairs of Trousers

Rent R 3500.00 R3500.00
Insurance R150.00 R150.00
Wages R13.00 R13.00
Total R 3 653 R 3 653

➢ IT MEANS THEREFORE THAT FIXED COSTS ARE NOT AFFECTED BY THE NUMBER OF ITEMS PRODUCED OR SOLD.
➢ Total cost of goods produced or sold in a business is obtained by:
➢ Variable costs + Fixed costs = Total cost

Variable costs + Fixed costs = Total cost

For one pair of trousers R33.50 + R3653.00 = R 3 686.50

For ten pairs of trousers R335.00 + R3653.00 = R 3 988.00

Give learners this exercise:

➢ If the total cost of 10 bags of oranges costs R200. Calculate the cost price of 1 bag of oranges (cost per unit)?

Answer:

Total cost ÷ Total number of units = Cost per unit

R 200 ÷ 10 = R20

One bag of oranges is R20.

CONCEPTS TO BE LEARNT

1. Variable costs are the costs/ expenses are that change every month and depend on how many products you make.
2. Fixed costs are the costs/ expenses that are the same/fixed every month and do not depend on how many products you make.
3. Unit cost is the cost of making one product. Formula for Unit cost is:
Variable costs plus fixed costs
Number of units made
4. Total costs are the total production costs, that is, variable costs plus fixed costs.
5. Cost price is the price at which goods are purchased or produced
6. Sales is money received for goods sold.
7. Selling price is an amount that an item will be sold on with Profit added on it.
8. Profit is when income is more than expenses
9. Loss is when the expenses of the business are more than the income
10. Mark- up percentage is a percentage added to the cost of goods in order to get the retail selling price.
11. Surplus: When budget income exceeds expenses
12. Deficit: When budget expenditure/ expenses exceed income