Finance- understanding cost, revenue and profit for a business

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Mayank Sharma

Finance- understanding cost, revenue and profit for a business.

All transaction needs to be recorded, concerning:

  • Cost
  • Revenue
  • Profit

Cost

In accounting, costs are the monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity.

Here are some of the costs a business needs to know:  

  • Fixed
  • Start-up cost
  • Variable
  • Total
  • Marginal
  • Semi-fixed costs
  • Direct costs
  • Indirect costs
  • Average
  • Operating costs

Fixed costs

These costs do not change however many units of a product are made. Factory rent, insurance premiums and administration salaries stay the same, whether the factory is working at full capacity or producing nothing. The owner of the business may have taken out a loan to buy equipment or refurbish a building. The loan will have to be repaid whether or not the business has customers.  

Variable costs

Variable costs change as output changes. For example, the amount of raw materials needed varies as the levels of output go up or down. Piece-work wages also fluctuate, depending on the employees' efficiency and the demand for the company's products.  

Start- up costs

These are incurred before a business begins to operate, such as the purchase of land, building and equipments.

Total costs

The fixed costs and the variable costs are added together to establish the total costs. The fixed costs remain constant, but the variable costs increase in direct proportion with output.  

Marginal costs

Using marginal cost is a way of measuring how much more it will cost a company to make one more individual item.

Semi-fixed costs

Semi-fixed costs are costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increased production.

Also telephones and electricity for instance have a fixed and variable element: a standard line rental and then a charge for each call/unit of electricity after that.

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Direct costs

Direct costs are costs which can be identified directly with the production of a good or service; e.g. raw materials.

Indirect costs

Indirect costs are costs which cannot be matched against each product because they need to be paid whether or not the production of good or services takes place; e.g. rent on the premises.

Classification of costs help allocate costs to right parts of the profit and loss account and also helps analysis of the break even point of the business.

Average costs

The example of the CD shows the benefits of economies of ...

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