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Determining Costs
Many businesses fail or have poor results because they don't take
into account all the costs associated with producing their product
or service.
In most businesses, costs can be broken down into two categories:
- Fixed costs: These are overhead costs that
don't change, regardless of production levels. They are sometimes
referred to as overhead costs or indirect costs.
- Variable costs: These are direct labour and
material costs that increase or decrease in direct proportion
to the amount of goods or services produced. They are sometimes
referred to as direct costs.
Determining the total costs of producing your product or service,
and deciding which costs are variable and which are fixed, will
have important implications for your overall financial planning
and decision making. This will have implications for the price you
charge and the volume of product or service you produce.
Sometimes it's difficult to determine if a certain cost is fixed
or variable. For example, in most small businesses some employee
costs are fixed and others are variable. Direct labour costs associated
with the actual production of your product or service are considered
variable costs. On the other hand, the wages paid to staff who work
in areas such as administration or sales are usually considered
fixed overhead costs.
Your accountant or bookkeeper can help you identify which of your
costs are fixed and which are variable. For more information on
determining and recording costs (expenses), refer to ED&T's
Recordkeeping for Small Business.
For more information on using costs in your business planning decisions,
refer to ED&T's Financial
Planning for Small Business.
Sometimes your total fixed and variable costs do not add up to
the true costs of producing your goods and services. This is because
intangible costs, such as machine set-up time, idle time, and time
for estimating and bidding on jobs, cannot always be calculated.
If you cannot accurately calculate these factors, a miscellaneous
expense element must be added to your cost calculations.
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