In the world of finance, the term "total costs" can refer to many things. For example, it can refer to the costs of running a business, the costs present in the personal budget or even those of a new project (such as the expansion of a company or the purchase of an asset). Fortunately, the basic steps are the same regardless of the "total cost" to be calculated: you just have to add the "fixed costs" (i.e. the minimum necessary expenses, or fixed expenses) to the "variable costs" (i.e. the expenses that can be be modified according to the chosen strategy, or variable expenses).
Steps
Part 1 of 3: Calculating Total Costs in a Personal Budget
Step 1. Calculate fixed costs
Start by establishing a period of time for which you want to calculate the total costs, then add up all the fixed costs incurred during that period. Most (but not all) fixed costs are calculated on a monthly basis.
- In this case, the fixed costs are the expenses it is compulsory to pay. For example, rent, utilities, telephone subscriptions, gasoline, grocery shopping. Fixed costs don't vary much from month to month, they don't increase or decrease based on the choices you make about your budget. Just to understand, your rent will remain the same even if you decide to shop at your favorite clothing store.
- As an example, let's say you want to make a budget to start saving money. Again as an example, let's say that the monthly fixed costs amount to: rent = 800 euros, utilities = 250 euros, telephone subscription = 25 euros, internet subscription = 35 euros, petrol (you can make a precise estimate especially if you are a commuter) = 200 euros, groceries = 900 euros. Adding all these expenses together, the total fixed costs will amount to 2210 euros / month.
Step 2. Add up the monthly variable costs
Unlike fixed expenses, the variable ones depend on the lifestyle you lead and are all those unnecessary expenses, but which can improve your quality of life.
- Variable expenses include travel, dinners, clothing (in addition to essentials), parties, purchase of fancy food, and so on. It should be noted that, in fact, even the amount of utilities can vary a lot (for example the heating in the winter and summer months), but this does not mean that variable expenses can be considered, as their payment is not optional.
- Continuing with the example, let's say that variable expenses include: theater tickets = 25 euros, weekend out of town = 500 euros, dinner for a friend's birthday = 100 euros, a new pair of shoes = 75 euros. This brings the total of variable expenses to 700 euros.
Step 3. Add the fixed expenses to the variable expenses to get the total cost
The total cost of living is the sum of all expenses incurred in a given period, usually a month. The formula to calculate it is very simple: Fixed Costs + Variable Costs = Total Cost.
Continuing with the previous example, if we add up the fixed costs and the variable costs we get: 2210 euros (fixed costs) + 700 euros (variable costs) = 2910 euros (total cost).
Step 4. Keep a record of your monthly expenses
Unless you are particularly virtuous, you probably don't record every expense you make during the month. This means that getting to grips at the end of the month could be difficult. Avoid having to figure out where your money went by keeping track of every expense you make. This way you can have a realistic estimate of fixed expenses, so that after a while you can start tracking only the variable expenses.
- Keeping track of fixed expenses is easy: consider household expenses, keep every bill and any receipt of large expenses you have made. An accurate estimate of the expenses for groceries can be difficult, but it is feasible if you keep the receipts or look for the corresponding movements in your checking account.
- Keeping track of variable expenses can be more complicated. If you use an ATM or credit card in most cases, at the end of the month it is easy to trace the amount of variable expenses by checking the account statement (perhaps online, since most lenders now provide this option). On the other hand, if you often pay in cash, you may want to write down your expenses as you make them or keep the receipts.
Part 2 of 3: Calculating the Total Costs of a Business
Step 1. Calculate fixed costs
In the business world, fixed costs are often referred to as overhead costs. In practice, it is the cost incurred to keep the business open. More specifically, they are those that do not vary as production varies.
- The fixed costs of a business can be compared to the fixed costs of a personal budget and in many things they are similar. Even in the case of an activity, in fact, the fixed costs for rent, utilities, financing in progress, equipment, machinery, insurance and the cost of the work necessary to keep the activity open, excluding instead the work necessary for production, must be calculated..
- Let's take the example of a company that produces footballs. The fixed monthly costs are: rental of the property = 4,000 euros, insurance = 1,500 euros, ongoing financing = 3,000 euros, machinery = 2,500 euros. In addition, every month 7,000 euros must be paid for the salaries of employees not directly involved in the production (caretakers, security guard, etc.). The sum of all the amounts quoted up to now is 18,000 euros / month.
Step 2. Calculate the variable costs
In the case of an activity, the variable costs are a little different from those considered for a personal budget. The variable costs of a company are those expenses that depend on the quantity of goods or services produced by the company itself. In other words, the more the company produces, the higher the variable costs will be.
- Among the variable costs of a company must include: raw materials, shipping costs, cost of labor and workers directly involved in the production process, guaranteed customer assistance and so on. Furthermore, utilities can also become part of variable expenses if they are directly influenced by the quantity of goods or services produced. For example, an automobile factory that uses robotic assembly lines, the more electricity it uses to run the lines, the more cars it produces. In this case, the electricity user can be included in the variable costs.
- In the balloon factory example, let's say the monthly variable costs are: rubber = € 1,000, shipping costs = € 2,000, wages for workers = € 10,000. In addition, the rubber vulcanization process uses a lot of natural gas and its consumption is directly related to how much rubber is vulcanized, that is, how many balls are produced. For the month under consideration, let's say that spending on natural gas amounts to 3,000 euros. Adding all these expenses together gives a total of 16,000 euros.
Step 3. Add the fixed costs to the variable costs to get the total cost
The formula for calculating the total costs is the same as that used for the personal budget: Fixed Costs + Variable Costs = Total Cost.
In the example we have done, the fixed costs are 18,000 euros / month, the variable costs (for the month considered) are 16,000 euros, so the total cost in the period considered amounts to 34,000 euros.
Step 4. Look for the company's total costs within the company's income statement
In most cases, the income statement clearly shows fixed costs and variable costs. You should find a list of all the items that have been mentioned before, plus others specific to the type of production, company and location. The income statement is an official document that all companies must have.
You can also consult the company balance sheet to get an idea of the debts the company has to third parties and what amounts it has yet to repay. In fact, the company financial statements, among other items, indicate the company's liabilities, that is, the debts that are still open. These accounts can help in assessing the soundness of a business: if the earnings are just enough to cover the total costs and there are many outstanding debts, the business could be at risk
Part 3 of 3: Calculating the Total Cost of an Investment
Step 1. Calculate the initial investment price
When it comes to determining the cost of an investment, expenses are usually not limited to the money you invest in a stock, mutual fund, etc. For those who do not have direct access to the stock market (almost all normal people) it is necessary to turn to a broker or financial advisor to help build a portfolio and, since these experts do not work for free, the cost of an investment will be higher. the amount of money you set aside to do so. Start by identifying the amount of money you intend to use solely for the investment.
As an example, let's say you recently inherited $ 20,000 from a relative and instead of wasting it all on a luxury vacation, we want to invest half of it in the stock market for a long-term profit. In this case, we will say that we are investing € 10,000
Step 2. Consider any type of commission
As we mentioned earlier, a financial advisor doesn't work for free. Generally, this type of professional figure is paid in two ways: a fixed rate (usually by the hour) or through a commission (usually a percentage of the investment). Either way, it is easy to determine the impact on the total cost. For fee-based consulting, multiply the consultant's hourly wage by the hours spent managing your portfolio, including any associated secondary expenses.
Following our example, let's assume that the consultant we have chosen has an hourly rate of 250 € (not bad, this rate can be as high as 500 € per hour). Let's assume that the agreement is 2 hours of work to put on your portfolio, his fee will have a total of 500 €. We consider that we need an additional € 100 for other minor expenses and we will get a total cost of 600 €.
Step 3. Add commission if needed
The other form of payment for a financial advisor to manage your investments is commission. This is generally a small percentage of what you buy through this professional figure. The more money you invest, the smaller the percentage is usually.
- In our example, let's imagine that in addition to his fee, our consultant also wants a 1% commission. This is just an example - in the real world, one of the two forms of payment is usually chosen instead of both. In this case, since 2% of the € 10,000 we want to invest is 200 €, we will add this sum to the total cost.
- Attention. With payment being based on how much you buy and sell, some commission consultants are known for their unethical behavior - they convince clients to get rid of old stocks and buy new ones frequently in order to line their pockets. Only contact consultants you know and trust. Otherwise, flat rate consultants tend to have fewer conflicts of interest.
Step 4. Be aware of taxes
Finally, add the cost of any government taxes incurred as part of the investment process. These can vary depending on the state you live in, so be sure to speak to a reputable advisor to find out all the details of this type of expense before investing.
Also according to our example, suppose you have to pay a 1% investment tax (again, in the real world this percentage could be completely different, depending on where you live). In this case, since 1% of € 10,000 is 100 €, we will add this sum to our total cost.
Step 5. Add up
Once you have determined the initial investment, associated fees and commissions, and taxes, you are ready to calculate the total cost - simply add up all the data.
- Let's solve the problem of our example:
- Initial investment: € 10,000
- Rates: 600 €
- Commissions: 200 €
- Taxes: 100 €
- Total: 10.900 €
Advice
- You can also use the total cost calculation to determine the total revenue. In the example above, if the company sells balls for 39,000 euros per month, the total revenue will be 5,000 euros per month.
- From this amount (turnover - total costs), however, the taxes still have to be subtracted.
