Higher PROFITABILITY with management refinement.
As we have already said, a company's behavior, attitudes, and way of operating are reflected in the reduction or increase of costs. The more automated, standardized, structured, sequenced, and reliable the cost information is, the better its management and, consequently, its profitability.
It is necessary to structure the costing system to obtain solid information, since the complexity lies in the processing of the data. The basic objectives of a costing system are to manage its costs for management and accounting purposes. But it is possible to go beyond that, and generate cost savings and greater profitability. And this will be a major competitive differentiator for your industry.
Let's understand this topic better!
Cost concept and structuring
The terms Expenses, Costs, Expenses and Investments are widely used in accounting language, so we are going to conceptualize them, promoting a better interpretation in this regard.
Expenses: amounts spent with the purpose of acquiring goods and services intended for the transformation that generates other goods and services.
Cost: they are expenses intended for production, on the transformation of materials to generate other goods and services.
Expense: expenses generated directly or indirectly, to obtain revenues, and occur due to the existence of the company's internal areas, such as administrative, marketing, commercial, among others.
Investment: amounts deriving from the acquisition of goods and services that are part of the company's fixed assets (machines, equipment and materials purchased and stored).
The interpretation of these terms will allow us to understand more clearly the costing criteria, which we will see later.
Industrial Costs and Expenses
Industrial and commercial activities incur a series of expenses to carry out their resource management processes, purchases, production, commercialization, etc. These expenses are not always considered Costs.
Let's look at a simplified structure of the Income Statement for the Year (DRE):
As can be seen in this simple DRE model, Costs and Expenses are treated separately.
Os Costs are the result of the transformation of raw materials into elaborate products, while Expenses are the result of the management of the company and the sale of the products. Next, we group the departments of a company according to their types of expenses.
Factory and Production
Factory: covers the cost centers where Costs occur, such as warehousing, maintenance, laboratory, production planning, etc.
Production: cost centers that effectively produce, such as spinning mills, warping, weaving, dyeing, cutting and sewing, among others.
Administration and Sales
Administration: includes all cost centers, such as human resources, accounting, information technology, for example.
Sales: consists of the cost centers related to the commercialization of the products, such as sales, customer service, marketing, etc.
Classification of Costs and Expenses
To determine the cost of products within a transformation process, we classify them into:
- Direct: are those costs that can be conveniently identified with the production of goods and services, such as direct materials and direct labor.
- Indirect: all other production costs, such as rents, depreciation, and salaries.
Classification by behavior in relation to volume changes:
- Variable Costs and Expenses: are directly related to the volume of production or sale.
- Costs and Fixed Expenses: they represent the installed capacity that the company has to produce or sell, regardless of the volume of production or sale.
- Semivariable Costs and Expenses: vary depending on the volume of production or sale, but not in exactly the same proportions. These Costs and Expenses have a fixed installment, but in the others they become variable.
- Semifixed Costs and Expenses: expenses that remain constant within certain intervals, changing in steps until a new level of activity is reached.
Identification: The rule is to consider how Direct Cost any cost element whose quantity applied to the product can be perfectly identified. On the other hand, the cost element whose quantity applied to the product cannot be perfectly identified is a Indirect Cost.
Other classifications that deserve to be mentioned, as they facilitate the understanding of the costing system:
- Primary Costs: direct labor, raw materials and inputs applied to production.
- Transformation Costs: process costs, costs generated by the general manufacturing expenses allocated to the process to transform the raw material into an elaborate product. Also known as Conversion Costs.
- Production Costs: are all costs related to the production of elaborate items, raw materials and inputs, direct labor, and indirect costs.
As we said, the complexity lies in the treatment of the data, and let's face it, there are many data to be treated. The good news is that in a specialized computerized system, already in product and process engineering, all these variables and information are considered, and thus, the company's operating mode in relation to Costs is created, in which all variables are treated and nothing is left to be defined in turbulent moments and subject to errors or distractions.
In addition, the information will be in a single, standardized, structured, sequenced, and reliable tool.
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This is the second in a series of three articles on COSTS in the INDUSTRY, access the last article at the link below.
- Costing methods applicable to production
See you later!
