 Hello friends, I am SR Doolange working as an associate professor in the Department of Mechanical Engineering at Vanchand Institute of Technology, Solarpoor. In this video, we will discuss on writing a business plan part 3. Under this, we will have a discussion on cost and cost drivers. At the end of this session, students will be able to apply the cost and cost drivers while writing a plan for starting a business and getting funds, content, profit, cost and cost drivers, cost classification, direct cost and indirect cost, fixed cost and variable cost and references. Business plan. Pause the video for a moment and think what is cost driver and why it is important in writing a business plan. A cost driver is the unit of an activity that causes the change in activities cost. Cost driver is any factor which causes a change in the cost of an activity. Cost drivers will help you to make accurate expense projections while writing a business plan. Profit. Now, every organization's objective is to increase the profit. Now, how to increase the profit? First of all, try to understand what is profit? Profit is a percentage of sales or we can say revenues. To increase profit, you have to increase sales. Alternatively, increase price which may be unsustainable. Reduce the cost. How to achieve that? Use automation but the capital cost may be huge. You try to sell more but how to do or how to achieve it? You advertise but you incur cost in the process. How much to spend on advertisement and what is the gain? So, these are the factors which need to be considered while improving the profit of an organization. Now what is cost? Now here, basically total cost consists of fixed cost and variable cost. Now how to calculate the profit? Profit is equal to sales minus total cost. Now how to calculate the sales? Sales is equal to unit price of a component or a product into number of products sold. Cost and cost drivers. What is cost? Cost is the price that one must pay a sacrifice or resource given up for an atom or service. When an atom or service is procured and used up immediately, the cost is easy to allocate but when it is used for a long period, the cost is difficult to allocate. This is nothing but how to allocate the cost. Cost driver is any output measure that causes cost that is causes the use of resources. A factor or an input that can cause a change in the cost of an activity. The cost of an activity may be driven by more than one cost driver. Cost drivers. A factor, change of which causes a change in the cost of an activity. An activity can have more than one cost driver attached to it. For example, changing cost of fabric in the case of manufacturing a garment, wages to tailor, cost of button, machine hour, electricity, thread, interest rate and rent of space are cost drivers for a shirt or a garment. Now these are the cost drivers. Now here you will have a rent, depreciation, salary, maintenance. These are the cost which are associated with manufacturing a shirt. Now cost of the fabric is a direct cost, wages to tailor is a direct cost, cost of button is a direct cost and it is variable because if the number of shirts increases, these also increases. Now how do you classify the cost? Basically there are two ways to classify the cost. One is a product specific, another is a company specific. In a product specific, first is a direct cost and second is indirect cost. Direct cost is directly traceable on each product such as raw materials, direct labor cost etc. Indirect cost difficult to estimate, exact cost on each product. Now in company specific there are two types, one is a fixed cost another is a variable cost. Fixed cost is a cost that is not related to activity level, a company has to bear it even if there is no activity like a rent or the interest which you are paying. It is proportional to level of operation or we can say level of production. Direct cost and indirect cost, a direct cost is identifiable. On the product the cost of the material and the consumables go into creating a product is a direct cost, number of direct costs are less. Direct cost, cost which is not traceable on the product such as rent, depreciation etc. are indirect cost. Say you are paying salary to regular workers, how much of that has gone into produce one unit of product is very difficult to identify. Fixed and variable cost, fixed cost are defined as expenses that do not change as a function of the activity of a business within the relevant period. For example, a manufacturer must pay rent of factory premises, utility bills, depreciation, salary to administrative staff, interest on term loan etc. irrespective of the level of activities and sales. Interestingly fixed cost on per unit basis decreases as a production increases and variable cost remains constant on per unit basis. Now let us take an example of readymade garment business. Now what is a fixed cost and variable cost by for this example, salary paid to regular employee it is a fixed cost, does not vary with level of activity, wages paid to contractual workers it varies that is a variable cost as it varies with number of garments. Fixed cost, indirect cost, rent on depreciation, own building or by rent or monthly annual basis will remain same even the production changes. Similarly, machinery will be a fixed cost, why it is indirect because it is not traceable on the product. Variable cost that is direct cost, material cost is variable as number of garments increases so it is directly proportional to quantity, why it is direct because it is identifiable. On the product, variable cost, now here packaging and delivery varies with the atom, transportation it varies with the atom, so variable cost it is proportional to level of operation. Now here one more example of variable cost, electricity proportional to level of operation in terms of time, days, months etc. Material and labor cost, material and labor cost is variable and is directly proportional to quantity for one shirt cost of material and labor will be less compared to 20 shirts. Consumables, direct and variable, consumable cost is variable and is directly proportional to quantity also identifiable on the product so it is direct cost. So here it is shown the thread which is used for the garment and the buttons. Money spent on machinery has to be recovered in the form of annual depreciation. Maintenance usually variable but may have both fixed and variable component. Suppose you have both routine or preventive maintenance and need based or troubleshooting maintenance the first part is fixed cost and the second part is variable cost since the latter will be related to level of operation that is need based or troubleshooting maintenance. Insurance can have both fixed and variable components. Insurance for fixed asset if make exclusively is fixed cost. Insurance for inventory of material and finished goods is variable cost. Now how to separate? The percentage of the fixed component of insurance cost is determined based on historical ratio or based on assets value. Similarly, interest, interest cost for long term loan raised from bank to create fixed asset is fixed cost. Trading capital is a variable cost. Now these are the references which are used to create this video. Thank you.