3rd Bac - Investment and Costs

1. Do the cover page for 2nd midterm 1st partial

2. Copy the following class in your notebook

Defining the investment needed

After the studies related with the market, the productive process and the resources needed to generate the good or service are done, the entrepreneur must transform this data and information into monetary terms. Among the fundamental elements, that take part of the total investment are the investment of working capital and the investment of fixed capital.

The Physical and Material Resources to start an Entrepreneurship

With the information about the estimate of physical and material resources, the entrepreneur is in the capacity to express them in monetary terms. This way we can know if the financial resources available are enough to finance the business that you want to begin. 

The estimate of the investment needed is an activity that helps to evaluate, at first the feasibility of what the entrepreneur wants to make, because it will be difficult to get funds for projects too ambitious in terms of investment. Also, the amount of the investment will focus in the increase of the risk that the entrepreneur will take. Specially if the entrepreneurship is financed through some type of financial loan.

In accounting terms, the investment is set under assets. This can be current or fixed, in the language of designing and evaluating of projects, they are known as working capital (current assets) and fixed capital (fixed assets).

Direct and Indirect Cost

In any business, you have two kinds of costs: direct costs and indirect costs.

A direct cost is the cost of producing goods or services (e.g. raw materials and labor). Direct costs are only reported when the goods are sold. If the goods are not sold, the goods remain as an asset on the balance sheet.

An indirect cost is an operating cost that remains about the same whether you make any sales or not. An example would be rent–it stays the same whether a restaurant serves 50 people or 150 people.

Fixed and Variable Cost

Fixed costs are predetermined expenses that remain the same throughout a specific period. These operating costs do not vary with output or how the business is performing. To determine your fixed costs, consider the expenses you would incur if you temporarily closed your business. You would still continue to pay for rent, insurance and other operating expenses.

Some examples of fixed costs include:

-       Rent

-       Salaries

-       Loan payments

Variable costs change over a specified period and are associated directly to the business activity. These are based on the business performance and the volume of services the business generates.

Some examples of variable costs include:

-       Labor

-       Taxes

-       Wages of part-time staff

Production Cost

For a business owner, knowing their cost of production is a vital step in creating and maintaining a profitable business. By knowing the cost of every step in production, management can optimize production processes, delivery schedules, and general business activities in an effort to make better products more efficiently than in the past.

Management accountants analyze product processes and track this metric in order to properly price their goods and services to achieve an appropriate margin. For example, an orange juice company management will track the price of oranges, sugar, and other supplies used in the production of their juice. If any of these goods’ prices increase, the juice manufacturer will also have to increase their prices to maintain the same level of profits.

3. Scan or take pictures of the cover page and the class copied in your notebook and send it to me email in a PDF format. engteachermiken@gmail.com