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What Is Total Cost?

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  • Written By: Felicia Dye
  • Edited By: Melissa Wiley
  • Last Modified Date: 29 August 2016
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Total cost refers to the full price of conducting business. This amount is determined by considering all expenses. In accounting, calculating overall cost is achieved by adding fixed costs and variable costs. With regard to investments, total cost includes all ocategories of expenses related to a particular investment, including its purchase price, commissions, and taxes.

There are certain expenses for an operation that do not change even if the volume of business changes. These are referred to as fixed costs. Although over time a fixed cost can change, it is an expense that remains stable for an extended period of time. For example, the rent for a company's business space may increase after the first lease period, but rent during those initial years is considered a fixed cost. Other fixed expenses may include insurance, property taxes, and machinery rental costs.

Companies also have variable costs, which are expenses that have fluctuating prices. High volumes of business will generally require more power, for instance. This means that, as the business volumes fluctuate, electricity costs will also fluctuate. Other variable costs can include labor, supplies, and distribution. To determine the total cost, these two categories of expenses, fixed and variable costs, must be combined.

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When analyzing investments, it is necessary to consider different types of expenses. To begin with, there is the purchase price of the investment. A share of stock in ABC Cola, for example, has a specific price, but that price does not reflect the total financial burden of acquiring it. There are likely to be other expenses, such as brokerage and transaction fees. Other types of investment expenses may include commission, taxes, and exchange rates.

Once all expenses related to a particular investment are added together, it is possible to determine the total cost of that investment. As an investment can be acquired through several different means, it is also possible for the same investment to have different total costs. This would be seen, for example, if two investors purchased the same stock through different brokers.

It may sound simple, but tallying total cost is often a complex and time-consuming task. It commonly requires specialized skills. For businesses and investors to have this kind of knowledge is important for several reasons, such as accurate budgeting. It is also necessary if the profit or loss during a specific period or related to a specific investment is to be accurately determined.

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Mor
Post 2

@KoiwiGal - Well, it is starting to get to the point where businesses are having to consider environmental impact when they are calculating their total cost of ownership.

Most of the time there are fines for polluting, and there are carbon taxes and so on, depending on where the company is based.

As well as that, companies know they need to have a clean green reputation now, or they won't be as successful. So, a lot of the PR budget might go into environmentally based projects, and research could be focussed on that too.

It's not government regulated, and admittedly companies will get away with what they can, but it's better than it used to be, and hopefully, will continue to improve.

KoiwiGal
Post 1

I know this isn't a popular idea with most businesses right now, but I really wish that they would consider the impact on the environment as a "cost".

I guess this would need to be done at a governmental level to figure out the total cost formula, but it makes so much sense when taken at in larger economic scale.

Polluting rivers, for example, affects others in the economy, like fishermen and councils who have to filter it for drinking water, etc.

If it was truly seen in economic terms, translated into money like taxes, when it comes down to it, are social needs translated into money, the world wouldn't be in the trouble it is in, I think.

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