For a unit to exist there will be running costs, thus these must be included within the plan. By understanding the costs, resources can be easily tracked and forecast for future expenditure.
The charges have to be accurately analysed by the unit to make it possible to maximise profitability and bring any financial plan to reality.
The effectiveness of understanding costs shows in:
Understanding alternatives from numerous options. This will result in proper utilisation and investment of scarce resources.
Evaluation of the key personnel within a unit that is responsible for the cost.
Assessment of the activities or in executing income-generating efforts.
Cost is assessed via the following angles:
Total Costs: This is the aggregate projection of cost that would accompany the execution of a particular activity.
Average Costs: This is the total cost per unit output of the activities executed by an entity.
Marginal Costs: As activities continue to increase within the sphere of a particular unit, the cost it takes to execute additional activity that generates output is the marginal cost.
Other cost classifications arise during the execution of activities for revenue generation.
Fixed Costs – These are costs that are constant regardless of the activities that are projected for the creation of revenue by a unit. These costs may be modified in the long term but are not adjusted in the short term, whenever the company’s goals are set.
Some other Cost types include variable costs, capital costs and recurrent costs. All these costs should reflect on the composition of a financial plan.
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