Costs. Assets and liabilities

The money that a business spends in order to produce goods or services is its costs. Different businesses have different cost structures and define and calculate their costs in different ways. One way of classifying the costs of a business is to relate them to the output of the firm.

Fixed costs are those which remain unchanged whatever the level of output, e.g. rent, interest charges, salaries; variable costs change directly with the output of the business.

Direct costs are directly related to the things produced. In manufacturing, for example, direct costs include raw materials and wages.

Indirect costs may include things like social security charges on top of the wages.

Overhead costs or overheads are used to mean different things, but usually cover all the regular non-production costs of running a business, such as salaries and telephone bills; they may include the cost of marketing. Costs are also referred to as expenses or expenditure.

Things of value owned by a firm are its assets. Fixed assets are long-term assets which are for use in the business and not for re-sale (land, buildings, furniture, etc.)

Current assets are used in the course of business. They include cash, receivables, bank deposits and investments in other companies. The assets help generate the income of the company.

Liabilities are what a business owes to those outside the business. Liabilities are classified as either long-term liabilities which are due for repayment after more than one year, or current liabilities which are short-term debts and debts to suppliers the company expects to pay within one year.

1 What are costs? 2 Do different businesses have similar cost structures? 3 How can the costs be classified? 4 What are fixed costs? 5 Do variable costs remain unchanged whatever the level of output? 6 What are direct costs related to? 7 What do indirect costs include? 8 What do overheads mean? 9 What are assets? 10 How are fixed assets distinguished from current assets? 11 What are liabilities? 12 How are liabilities classified? 12 What is the difference between long-term liabilities and current liabilities?

1 Match words that have a similar meaning:

2 Match the words and phrases in the box with the correct definition:

1) the money that a business spends in order to produce goods or services; 2) the quantity of goods produced; 3) the money spent to run a business, such as rents, salaries, heating, etc. 4) items of value to a person, business, or institution; 5) money owed by company; a debt; 6) money that is owed to a business; 7) a sum of money paid into a bank; 8) an amount of money spent; 9) debts that are payable on demand or within one year;

10) money owed that does not have to be repaid until some future date; 11) the cost of materials, labour, etc. involved in making a product.