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There is a lot of confusion over defining the classifications for money spent in a business. Here we are dealing with Costs which are those expenditures related directly to the product that is sold
Materials and parts used, labour applied to assembly and processing and primary packaging are all items that should be called Costs since in total they form the Cost of Goods Sold (COGS) which, when subtracted from the Income from Sales, gives the Gross Profit that has been acheived from those Sales
Generally the Costs of items that are sold as part of the finished product are called Direct Costs since there are other elements of Costs that do not form part of the finished product. These are expenditure related to energy, premises, secondary packing and labour that will be applied to the product in general such as Quality and Storekeeping. Such costs are known as Indirect Costs. It is sometimes difficult to quantify Indirect Costs as in the case where all of the business is carried out in one rented building and it would be necessary to divide the rental costs according to the various areas used specifically for producing the product. This is not very practical for a small business and is more bother than it is worth so generally such costs are treated as Expenses or those expenditures used for operating the business
As far as HMRC is concerned it does not matter since they group all expenditures as Expenses but for a business to be aware of where it is generating the money that can be spent on the operation it matters a great deal. It will provide a very simple way to determine the breakeven level of business that an enterprise will need to acheive if it is to actually make money
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Last Update 28-Feb-2010
Date first published 07-Nov-2005