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The Hidden Truth of Cost: Do You Know How to Calculate the True Cost of a Deal?
In the business world, costs are a core component of business operations. Understanding the different types of costs and how to correctly calculate them can help businesses make more informed decisions and properly assess their economics.
Cost is a measure of the money expended in producing and delivering a service that can no longer be used.
Costs can be thought of as acquisition costs - this is the amount paid to obtain goods or services. Not only that, but also the costs in the production process and other expenses incurred in the transaction. This means that when a business considers the total cost of a transaction, it must take into account production costs, transportation costs and other related expenses.
Accounting cost types
In accounting, cost refers to the amount of money a business spends when purchasing goods or services. For example, when a company purchases raw materials, pays wages, or pays for equipment, these expenditures are considered costs.
Opportunity cost is the value of the best alternative not chosen, which means the potential opportunity a business loses when pursuing an activity.
Opportunity cost emphasizes the value of taking action. Whenever a business chooses to commit resources to a project, it must sacrifice other possible options. Therefore, properly understanding and managing these opportunity costs is critical to successfully remaining competitive.
Compare private costs, external costs and social costs
Generally speaking, every transaction is accompanied by private costs and external costs. Private costs refer to what the buyer pays to obtain goods or services, while external costs are that part of the transaction that is not paid by the buyer and may affect other people or society.
Social cost is the sum of private costs and external costs, and its impact on the environment and society cannot be ignored.
Take the manufacturing of automobiles as an example. The private costs borne by manufacturers include the purchase of raw materials and wages, etc. However, the resulting pollution and environmental impact are external costs. These external costs are not factored into the price, which makes them outside the market price mechanism.
Cost Assessment
When companies formulate business plans, they often need to conduct cost assessments to determine whether the expected benefits can cover the costs. During this process, cost underestimation can lead to cost overruns during implementation, which is often the case.
The cost-plus pricing method, where the price is equal to the cost plus a certain percentage of profit or overhead, is also quite common in commercial operations.
In business economics, the profitability of transactions depends on whether a company can maintain market price stability to cover operating costs and retain surplus.
Manufacturing costs and non-manufacturing costs
Manufacturing costs are directly involved in the production of products, mainly including raw material costs and workers' wages, and can be further divided into direct material costs, direct labor costs and manufacturing overhead costs. Non-manufacturing costs refer to those expenses that are not directly involved in the production of the product, including sales staff salaries and advertising expenses.
Other cost considerations
Defense costs refer to expenses incurred to eliminate or prevent environmental damage and are also used in the calculation of the Genuine Progress Indicator (GPI). Labor costs cover employees’ working hours, holiday pay, training expenses, etc.
When calculating costs, companies also need to consider many factors, which will affect their overall financial status and sustainable development.
Ultimately, the costs hidden behind every transaction are not only part of a company's financial operations, but also an extension of its social and environmental impact. As attention to the concept of sustainable development grows, how to balance these complex costs and benefits within the allowable range has become a major challenge for enterprises today.
Have you ever re-evaluated the hidden costs you face in your daily life?
