The importance of costs is that they play an essential role in promoting business. It becomes critical when we consider the importance of "selling price" and "discounting" to any business. Especially in this way the long recession and low economic performance
But it is also important that cost reduction is essential for the efficient operation of an enterprise. What Makes It Wrong:
- Reducing Costs for Productivity; or
- is doing a cost-cutting program that does not meet
In order to avoid collapse of profit with improper pricing or epic error, consider the 4 cost categories.
- Direct Costs . They are directly related to sales and production, as well as key revenue publishers.
- Indirect Costs Basic business costs that are not part of the manufacturing process and are not technically revenue publishers.
- Variable Costs Costs Relating to Changes, Sales and Effects of Changes
- Fixed Costs Costs and Expenditures That Expire on a Specific Time Period and / levels remain constant
These are all familiar to you, but it's important how they relate to each other. And this is
- All direct costs have constant and variable components
- All indirect costs have constant and variable components
Simple case study
a real example, a few years ago. The national railway company wanted to shut down the lossy stations. Thus, distant stations have been assigned along its rows after the total savings have been determined. However, in the post-closure period, financial evaluation showed little or no savings. The reason for this was that the costs of these stations were part of the operation of the central hub.
There was a policy that divides central costs into every revenue area. When savings were achieved at closing time, the company left the separate costs. The "direct costs" of operations were not properly substantiated . In case some profitable lines and stations are closed.
Some Cost Determination
Variable costs work as it sounds. Growth in production rises. When production decreases, it is reduced. Like sales. Cost categories categorized here:
- Costs of labor
- Cost of production or factory workers
- Overtime charges
- Shipping costs
- Import duties
- Sales commissions and bonuses
- Staff bonuses
and never change. Of course it changes over time. And they change when production grows or decreases. The most common costs associated with the definition are:
- property tax
- depreciation / amortization of capital goods (cars, machines)
- staff costs
- energy costs
Fixed costs are fixed only because they can not start a business without them. So they become the "permanent" part of the business. But it's not everyday. Rents rise over time. The increase in production requires more machines, so the amortization cost rises as the cost of energy used to drive the machines.
Application of Principles
In the example above, cost allocation is critical Decision Making. The cut and dried workouts seemed completely confused. Therefore, the importance of any undertaking that is more inclined to make the right financial decisions can not be over-emphasized.
Relevance is reflected in product pricing. There are many examples of small companies using discounts for "Groupon," and each unit sold has been monetized. The reality of the companies was that their production costs were wrongly paid and they used a sales price that did not cover it. Therefore, their overall loss would be greater if they take into account their indirect costs.
Cost allocation is critical. Pricing is at the heart of commercial sales and marketing. Cost control is at the heart of every business decision. If you do not apply the principles, you have no second chance.
Source by sbobet