Type of company expenses Calculation formula Designation in the formula
Alternative (economic) Vd - Fd Vd – possible income
Fd – actual income
Medium-permanent Pz / Op Pz – fixed costs
Op – volume of goods produced
Average-variable PrZ / Op PrZ – variable costs
Op – volume of manufactured products
Marginal Cost of a Firm UZ / UOP Uz - increase in costs
UOP – increase in the volume of manufactured products
Profitability is the income that an organization could email lists uk earn if management made a different decision. It is calculated by multiplying the current rates by the quantity of goods sold at different prices.
The least variable and constant costs of a company are those incurred in producing one unit of output. These are the average costs of the company.
The costs of producing additional goods are called marginal. They reflect how much the volume of production will increase with an increase in the costs of purchasing raw materials and supplies.
Formulas and example of calculating the company's costs
Source: shutterstock.com
Example of structural costs of an organization. An agricultural company specializing in growing grain crops recorded the output of 2,000 tons of products in 2020. During the year, the following was spent:
for the purchase of seeds - 0.22 million rubles;
land rent - 0.1 million rubles;
equipment maintenance - 0.6 million rubles;
payment for the work of workers employed in the field and warehouse - 3.6 million rubles;
payment of salary to the accountant and remuneration to the head of the holding company - 1.6 million rubles;
fulfillment of tax obligations - 0.76 million rubles.
The corporation was given the opportunity to purchase all stocks at 36 rubles per kilogram, but the manager rejected the idea of concluding a contract. Ultimately, grain products were sold at a price of 26 rubles per kilogram. Thus, the enterprise was able to earn 26 million rubles, given the sales volume of 1,000 tons.
The costs of improving seed quality can be divided into direct costs associated with production, accounting, the possibility of capital recovery and achieving efficiency.
Land rental costs remain constant, direct, production-related and controllable.
Formulas and example of calculating the company's costs
Source: shutterstock.com
Equipment maintenance is more related to the production and financial costs. Paying workers is considered a direct and important cost related to production, accounting, and the possibility of return.
Advance payment of the accountant's salary and incentives for the top manager are included in a number of indirect and non-production expenses.
It is known that companies' offers for a more advantageous contract may lead to lost profits or economic losses. A special formula is used to evaluate them:
UV (ED) = Vd - Fd,
in which:
Vd is the potential profit,
Fd - real profit,
UV (ED) - lost profit or economic damage.
You can calculate the potential income by estimating the profit at the proposed price:
36 rubles per kilogram * 1000 tons = 36 million rubles.
36 million rubles - 26 million rubles = 10 million rubles - lost profit or economic costs.
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Cost Management Tasks
Cost management is a complex process that includes several important aspects:
maximum efficiency in using available resources;
strategic planning: it is important to know what resources will be needed in the future and in what quantities;
control system: it is necessary to track what and how many resources are spent on.
Lack of effective management or its complete absence leads to chaos. Money and resources are spent indiscriminately, which leads to hidden costs and loss of potential benefits for the company.
Without cost accounting, the company does not have an idea of cost. Without knowing the real cost of the final product, it is impossible to correctly determine the price for it. This leads to a situation where the product is either sold at an undervalued price, which entails losses for the company, or the price is too high, and as a result, demand for the product falls.
This, in turn, leads to erroneous management decisions regarding the product range. The production of goods is guided by the personal preferences of managers, which do not always correspond to the needs of the market.
As a result, the company continues to produce products that have long since lost their relevance.
Cost Management Tasks
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It is necessary to maintain control over expenses in order to approach the issue of their reduction wisely. It is possible to increase profits not only by increasing sales volumes, but also by optimizing costs.
Uncontrolled sales growth can lead to additional costs for marketing, increased labor force, equipment purchases, etc.
Cost management aims to increase revenues by reducing expenses without the need for large financial investments typical of production expansion. The key is to understand the causes of expenses and develop measures to optimize them.
To ensure production, it is necessary to have sufficient raw materials. One company may purchase them in small quantities, say for a week, while another would prefer to purchase the same raw materials for two months.
In the first case, the cost per unit of raw material will be much higher than in the second, due to the fact that suppliers provide a discount for large orders. The company needs to analyze both options and choose the most optimal one.
For example, if purchasing for two months will not lead to overflowing of the warehouse and financial difficulties, then it is better to have an additional supply of raw materials.
The mechanism for cost control within an organization provides an understanding of the following aspects:
the required volume of products and assortment for production;
full cost price of each product;
optimal price for the product;
the size of the discount depends on the volume of the purchase;
availability of resources at the current moment;
need for resources in the near future;
the level of profitability of the organization.