Definition: The Business Cost includes all the costs (fixed, variable, direct, indirect) incurred in carrying out the operations of the business. It is similar to the real or actual costs that include all the payments and contractual obligations along with the book cost of depreciation on both the plant and equipment.
The firms compute their business cost to determine the profit and loss and for filing returns for income tax. It is also used in several other legal procedures. There are several types of business costs:
- Variable Cost: The variable cost is the cost which changes with the change in the production. Such as raw material, wages of labor, energy used in production, etc.
- Fixed Cost: The fixed cost is the cost which remains fixed irrespective of the level of output. Such as rent, salaries of employees, advertising, and promotional campaigns, etc.
- Direct Cost: The direct cost is the cost which can be assigned to the production of certain goods and services. Such as labor, material, fuel, power or any other expense related to the production of a product is the direct cost.
- Indirect Cost: The indirect cost is the cost which cannot be directly attributed to the production of goods and services. Depreciation, supervision, security, maintenance and administrative expenses are the cost incurred which cannot be assigned to a specific product or department and hence are classified as an indirect cost.
Thus, the business cost is computed to determine the efficiency with which the firm is carrying out its business operations.