Business Finance and Arithmetic — Entrepreneurship STD 11 Commerce — Question

Costs incurred to start and run a business can be classified into two broad categories, which are as follows:

1. Start-up Costs: It is the cost which is incurred initially to start a business. It consists of expenses for acquiring assets and acquiring initial raw material and other related items of initial expenses, till such time the cash flow from the business can provide for these. This component of the start-up cost is referred to as working capital.

The following is a list of some of the start-up costs to be incurred:

1. Land: Acquiring land to set-up a business.
2. Building: Constructing building to start the business.
3. Computers: Purchasing computers.
4. Equipments: Investing money in purchasing equipments.
5. Machinery: Buying and installing machines.
6. Vehicles: Buying vehicles used for transportation purposes.
7. Vessels: The vessels which will be used in case of catering business.
8. Software: The software needed to be installed in computer.
9. Registration: For registering the company.
10. Inauguration ceremony: Expenses incurred at the time of inaugurating the business.
11. Raw materials: Purchasing raw materials for a manufacturing business.
12. Salary: Paying advance salary to attract talented persons during initial period.
13. Rent advance: Money to be paid in advance to the O landlord.

Costs incurred to start and run a business can be classified into two broad categories, which are as follows:

2. Operational Costs: These costs are for carrying out the day-to-day operations of the business or enterprise.

They are further classified as below:

1. Fixed Costs: These are the ones which an entrepreneur has to incur by virtue of the fact that one has started a business and is operating it. The fixed costs are not dependent upon the level of output.

Following is a list of some items on which expenses will remain fixed in nature:

• Consultancy charges.
• Travel.
• Salary.
• Wages.
• Rent.
• Telephone.
• Water.
• Office lighting.
• Office stationary.
• Employee welfare.
• Advertising.
• Insurance premium.

2. Variable Costs: These costs vary with the total cost of the organisation, when output varies. e.g. washing detergent in a laundry; hair shampoo in a saloon; flour, sugar, baking powder for a bakery.

Following is a list of some items for which the costs incurred are variable

• Raw materials.
• Packing material.
• Freight inward and outbound.
• Sales commission.
• Royalty.
• Factory power.
• Piece rate wages (wages based on production).

For all the above items, the cost incurred will be more if the sales are more and will be less if the sales are less.