How are total costs calculated?

• A. Revenue minus variable costs
• B. Fixed costs plus sales revenue
• C. Variable costs plus fixed costs
• D. Gross profit minus net profit

Answer: (C)

Total costs represent the complete expenditure incurred by a business in producing its goods or services, and they are calculated by summing both variable costs and fixed costs. Variable costs change with the level of production, such as materials and labor directly associated with production. On the other hand, fixed costs remain constant regardless of the level of production, including rent, salaries, and insurance. By adding these two types of costs together, a business can determine its total costs, which is essential for pricing, budgeting, and financial analysis.

Understanding total costs is critical for businesses as it allows them to properly assess profitability, set prices, and make informed operational decisions. This approach provides a comprehensive view of all financial obligations that a business must meet.