The cost of success
Something that I hear a lot from people is that they are scared or put off finance by a lack of understanding and some of the terminology and jargon used. In reality I suspect this is no different to a lot of specialisms – where training and experience help to make what appears complex more simple.
So the question I think that should be asked is what level of knowledge and insight you should leave to the experts and what should you want or need to know? This question is at the heart of a lot of the training courses I have been delivering over the last few months and those that I will continue to deliver going forward.
Over a series of blogs through the autumn I’m trying to cover some of the basics of accountancy to help people start to get to grips with “the numbers” and how they are prepared. Content that forms part of the Finance for Non Finance Managers workshops that I run. Last month I looked at the holy trinity of accounting statements.
Well for the second in this mini-series I will cover what the various ways we view costs in accounting.
1. Fixed & Variable Costs
- Fixed costs are those which do not change relative to the volume of output from a business – such as rent or rates.
- Variable costs are those that do change in proportion with the volume of output from a business – such as the cost of raw materials needed for production.
2. Direct & Indirect Costs
- Direct costs are those which are directly related to a product or service and are easily attributable to the product – for example the rubber used in tyre manufacture would be a direct cost.
- Indirect costs are those which are still linked to overall provision of products or services but where it is less easy to attribute them to a specific output – for example the cost of power supply to the tyre factory.
Although the definitions are similar it is possible to have variable yet indirect costs and fixed direct costs in a business.
Why have the distinction? This comes down to helping a business to fully understand their cost base and in particular it is of use in manufacturing or production environments where it is helpful to understand the definitive cost of Product A over Product B to help in decision making on pricing, production runs, expansion plans, capacity planning and longer term strategy planning.