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.
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.
