PDSnet Glossary

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Introductory Technical Fundamental Economics Opinion Sectors International Regulatory Other Markets

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Definition

This is something which a company has to pay for. Companies have two types of expenses - those which go up and down with sales and those which have to be paid even if there are no sales. The variable or direct costs increase and decrease with the level of sales. The most obvious of these is the cost of sales, but they can also include carriage inwards, salesmen's commissions and other costs directly related to the selling of products. Fixed or indirect costs are those which are completely independent of sales such as rent, salaries, telephone, electricity and so on. In the profit calculation, variable costs are deducted from total turnover in the trading account to arrive at gross profit, then fixed costs are deducted from gross profit in the Profit and Loss Account to arrive at net profit. Net profit is then carried to the Income Statement as Net Operating Income.

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