A business has many different costs, from paying for raw materials through to paying the rent or the heating bill. By careful classification of these costs a business can analyse its performance and make better-informed decisions.
The main ways in which a business needs to manage its costs are as follows:
Classification of costs into fixed and variable, direct and indirect.
Variance analysis to see if the business is keeping control of its costs.
Break even analysis which tells a business what it needs to sell to cover its costs.
An opportunity cost is the financial benefit forgone of the next best alternative use of money. A business can measure the outcome of a decision by comparing it with the benefits (probably measured in profits or revenue) it could have had if it had taken the next best option. The opportunity cost of buying a new piece of machinery might be compared with the benefits of spending the money on a new advertising campaign.