Determining Costs and Estimating Revenue D etermining C osts and E stimating R evenue Determining costs is sometimes difficult because there are so many that seem to be hidden but have to be taken into consideration. For example, consider someone who wants to operate a greenhouse and sell plants. To calculate the cost of one plant, the owner must add up the cost of seeds or a seedling, the cost of the soil used in the pot, the cost of the pot, the cost of water and fertilizer used on that plant, the labor cost for the time expended on that plant and an allocation of overhead. These costs include utilities, insurance, property taxes, supplies such as paper, sweeping compound, etc. and depreciation of the greenhouse and any equipment.
Depreciation is an allocation of the cost of an asset that has a life longer than one year.
The total overhead is then allocated to all products. The owner will also have to determine operating expenses for the year. These are administrative and selling expenses, not included in the costs above which are manufacturing costs. These operating costs would include advertising, cost of hiring a CPA to do taxes or accounting work, financing costs, and costs of operating an office. The owner must estimate how many products can be sold to determine revenue.