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What are Setup Costs?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 September 2016
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Setup cost is a classification of business expense that usually has to do with all costs associated with starting a new product or service line, or even initiating a new business of some type. The actual setup costs include any type of expense associated with the venture, ranging from research and development expenses all the way through to the creation of the production line. Businesses tend to look closely at the actual cost of setup involved with any project to ensure the venture has the potential to recover the costs and become profitable within a reasonable period of time.

The calculation of business setup costs begin with the investment of time and resources used to research the viability of developing a new product. Often, the research will include surveys to gauge potential consumer interest as well as analysis of the current market to determine what the new product would need to provide in order to compete with similar products. If the research indicates that developing a new product does have realistic potential, the findings of the research are passed on to a development team.

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With the research phase completed, the next cost to setup is normally the development process. Here, the data collected during the research phase is used to create a quality product that can be sold to consumers at a reasonable and competitive price. Developing a product will usually include setup costs like the cost of raw materials, designing the packaging, and in general coming up with a final product that is ready to go into mass production.

Once the product is developed, the next major type of setup costs involves the actual manufacturing process. This will include the cost of acquiring a site for the production process and purchasing machinery needed for the actual manufacturing of the new product. Along with the placement and creation of the manufacturing facility, most businesses will include the training costs associated with hiring and training employees to work the production line.

Other ancillary expenses may be considered part of setup costs. For example, clerical costs for the field surveys and the collation of the data during the development phase are often included. Many companies will also choose to include expenses associated with the creation of a marketing campaign are often considered integral parts of a business setup cost.

The inclusion of any and all expenses related to the cost for setup make it much easier for the business to determine the final cost of producing each unit. This figure in turn makes it simpler to determine a retail price for the product that will make it possible to not only offset the initial setup costs. Setting the retail price based on the amount of the setup costs also helps to ensure that the product will generate a profit sooner rather than later.

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