Topic 3.4 · Business Expenses
Business Expenses
Startup costs, direct vs. indirect and fixed vs. variable costs, COGS and cost of sales, operating expenses, and insurance.
20 min read Reviewed
Learning objectives
- 3.4.ADetermine startup costs associated with launching a new business or product.
- 3.4.BDescribe expenses associated with operating a business.
Objective statements © College Board, quoted from the Course and Exam Description.
Startup costs
Startup costs come in two kinds:
- One-time expenditures: legal fees, incorporation and licensing fees, sometimes equipment
- Initial expenses: occupancy (rent), R&D, marketing, insurance, initial inventory. These become ongoing once the business is running.
Classifying recurring costs two ways
| Fixed (doesn't change with output) | Variable (rises with output) | |
|---|---|---|
| Direct (tied to producing the product) | Factory rent | Raw materials, hourly production wages |
| Indirect (running the business) | Office rent, office salaries, insurance | Sales commissions (often treated as variable) |
Every cost can be classified on both dimensions. The CED notes that components of COGS can be either fixed or variable, and that operating expenses are typically fixed.
| Business type | Direct costs are called… | Includes |
|---|---|---|
Key terms
- Startup costs
- One-time expenditures to launch a business or product (legal, incorporation and licensing fees, sometimes equipment) plus initial expenses while getting established.
- Direct costs
- Costs tied to producing or delivering specific goods or services.
- Indirect costs (operating expenses)
- Costs of running the business overall, such as office rent, office and sales salaries, marketing, utilities and insurance.
- Fixed costs
- Costs that do not change with production level, such as factory rent.
- Variable costs
- Costs that rise as production or service levels rise, such as raw materials.
- Cost of goods sold (COGS)
- Direct costs for a goods producer: raw materials, production supplies, production wages and benefits, and costs of operating manufacturing facilities.
- Cost of sales
- Direct costs for a service provider: direct labor, travel and materials used to deliver the service.
- Insurance
- Protection against financial loss from accidents, injuries or damage. Some types, like workers' compensation, are legally required.
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