Cost Management in Business
Costs
The production process requires the sacrifice of a number of factors of production. This value represents the cost of producing the good or service.
The ideal of every company is meeting the objectives of the budgets, consuming the least amount of resources possible.
Cost data allows us to assess the competitiveness of enterprises. In fact, it is essential to:
- Set the selling price of products to achieve financial balance of the company.
- Differentiate between different possible investment alternatives.
- Determine the production volume best suited to the short-term.
- Identify the size of the organization long-term.
- Judge the productivity of the company and establish a policy of cost reduction.
Difference Between Expense and Cost
Expenditure
The acquisition of the monetary expression of factors in the development of the activity of the company, which will, in due course, be cash outflows (payments).
These acquisitions, until they are consumed in the production process, shall be treated as expenditure and not costs.
Cost
The monetary expression of the consumption of factors applied to productive activity.
The cost does not necessarily coincide with the price paid by a factor, because:
- The cost should include, in addition to the price paid for the consumed factors, all other costs resulting from its acquisition, conservation and consumption.
- The cost will reflect the value of consumption at the time of charging on the production activity. This value may not match the price paid, because of price fluctuations; hence, the correct practice is to assess the complaints at the replacement value at the time of consumption rather than purchase prices.
- On the other hand, there is the opportunity cost of the factor, which is but an additional fee to be drawn from this factor if it is a different use with better alternatives.
Cost Classification
The costs of an enterprise can be classified according to various criteria.
1. According to its Output
Raw materials, other supplies, personnel costs, outside services, depreciation, interest expense, provisions, etc.
2. As Can Be Allocated or Not to an Objective for a Given Product
Direct cost: One that can be shared among the various products, since it is known with absolute precision the extent to which each is responsible for having incurred this cost.
Indirect cost: One that cannot be objectively distributed between different products, since it is not known to what extent each is responsible for it. To be distributed, some prior apportionment formula, more or less logical, must be established.
The costs will be directly or indirectly depending on the type of company, the business carried out, and how it is organized. It may happen that a cost is direct for one company and indirect for another and vice versa.
Having a system of calculation and cost management within the organization is a necessity for managing the company.
Why Does Management Need This Information?
1st Perspective: A business approach basically dedicated to sales and collection.
2nd Perspective: Problems concerning sales and prices (mature markets, aggressive competitors, etc.)
3rd Perspective: Reorientation of business efforts: cost control and production systems reorganization (new prices, products, services, etc.)
What is the System of Calculation and Cost Management?
Part of the enterprise information system that provides analytical calculations and costs of the resulting products and services provided by the company. All this will be used, not just the information supplied by external accounting, but basically, the following tools with facts collected: internal company documentation, job observation, time measuring systems, questionnaires, interviews and more.
Benefits of Cost Accounting and Management
- Helps determine the normal or satisfactory price of goods sold.
- Helps fix a minimum limit for price reductions.
- Determines which products are most beneficial and which products are not.
- Allows the development of effective monitoring of stocks.
- Enables fixation of a value for stocks.
- Assesses the effectiveness and efficiency of various processes and departments.
- Makes it possible to establish internal cost reduction policies.
- Detects and allows the valuation of losses, waste and theft.
- Enables identification of the cost of having idle capacity in the company.
- Allows the elaboration of budgets with facts, standards and makes the appropriate analysis of the deviations.
Having an Information System for Decisions
Scorecard: These are periodic reports that, for each level of responsibility, collect all the relevant information, reflecting the actual situation of the company.