The identification of costs is a crucial aspect of any business and is required in order to understand and set products and pricing structures. For those who operate their business from home, a simple and organised way of identifying costs is to visualise one's daily activities and record each item which is used and requires purchasing.

Business costs may be divided into three main categories:

• Capital costs and revenue costs


• Direct costs and indirect costs


• Fixed costs and variable costs

Understanding Capital Costs and Revenue Costs

Capital costs (often referred to as capital expenditure) are those related to expenses occurring as a result of purchasing either permanent or capital resources in the organisation known as fixed assets. This may include money spent to increase the value of any existing fixed assets such as creating an extension to increase the size of the workplace environment. Capital expenditure also involves money spent on legal fees associated with purchasing property as well as both the carriage and installation of work machinery.

In contrast to capital costs, revenue costs are those which are necessary for the day-to-day running of an organisation. Unlike capital costs which typically last a long time, revenue costs include those which are used up within the space of a year. Example of revenue expenditure include items purchased for resale, materials used in manufacturing in addition to common expenses such as heating, lighting, rent, rates and salaries.

Understanding Direct Costs and Indirect Costs

In the majority of financial management related processes, daily costs associated with running a business unit come under the category of direct and indirect costs. The former costs are those which are essential or directly involved in the production of one's products while the latter refer to costs related to supporting the product service. A common aspect associated with indirect costs are those required to undertake processes related to administration. Indirect costs are those which are typically referred to within the business environment as 'overheads.'