SLC | S21W2 | Costs for entrepreneurs - Cost elements.
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There's a major relationship between costs and financial accounting which I am going to describe in tabular form;
| Costs | Financial Accounting Relationship |
|---|---|
| Classification | Fall under assets category ,expenses, or equity in financial statements |
| Measurement | Records at historical cost |
| Recognition | Similarities with revenues in same time period |
| Reporting | Reported in expenses and assets |
| Analysis | Useful for calculating profit like gross margin, net income |
| Decision making | Decision making management at price, budget and allocation of resources |
There's a difference between fixed costs and variable costs with some of the examples;
| Cost Type | Definition | Examples |
|---|---|---|
| Fixed Costs | They remain constant irrespective of alternations in production or volume of sales | Fare,salary,insurances,depreciation and mortgage |
| Variable costs | They alter directly with any alternations in production or in sales volume | Raw material,workers costs,utility,shipping,marketing costs |
Below are some more differences between fixed and variable costs!
• Fixed costs are those which remains constant but variable costs are not constant because they alter.
• Fixed costs are commitments for long time but variable costs are commitments short term.
• Fixed costs are considered uncontrolled expenses but variable costs are controlled.
If you understand fixed and variable costs then they may become helpful for predicting costs of businesses,for setting prices as well as for making me informed decisions.
Here are some of cost elements for a fictional company which is "SmartPhone Inc." which is in manufacturing of smartphones;
| Cost element | Description | Cost (per unit) |
|---|---|---|
| Direct Materials | Processors, screens, batteries | costs of $100 |
| Direct Labor | Assembling, testing process | costs of $40 |
| Overhead | Factories fare, utility | costs of $20 |
| Marketing | Advertisement, in promotion | costs of $10 |
| Research & development | Designing, software developing | costs of $10 |
| Packaging | Boxing, accessories | costs of $10 |
| Shipping | Logistics, transports | costs of $5 |
| Total Cost | total cost of $195 |
Fixed Costs:
| Fixed Cost | Description | Monthly cost |
|---|---|---|
| Factory agreement | cost of $50,000 | |
| Depreciation of equipments | cost of $20,000 | |
| Managing of salaries | cost of $30,000 |
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Variable Costs:
| Variable Cost | Description | Cost (per unit) |
|---|---|---|
| Costs of components | Alternations in prices of suppliers | costs of $5-$10 |
| Labor costs with time | Alternations in production volume | costs of $10-$20 |
To having a know how of cost elements are helpful in Smartphone Inc optimization of prices, production and allocation of resources.
These are costs which are separated in direct, indirect manufacturing, and non-manufacturing costs;
| Direct Costs | Amount |
|---|---|
| Direct Raw Material | cost of $130 |
| Direct Labor | costs of $100 |
| Delivery Costs | costs of $70 |
Hence total direct costs are of costs $300
| Indirect manufacturing costs | Amount |
|---|---|
| Manufacturing Supplies | costs of $210 |
| Depreciation of plant and machinery | costs of $25 |
| Plant Manager | costs of $65 |
| Taxes and plant insurance | costs of $70 |
| Building maintenance | costs of $50 |
| Public services | costs of $35 |
| Maintenance of distribution equipment | costs of $65 |
Here are total indirect manufacturing costs with $520
| Non-Manufacturing Costs | Amount |
|---|---|
| Sales Commissions | costs of $65 |
| Sales and administrative expenses | costs of $80 |
| Advertising | costs of $20 |
Here are total non-manufacturing costs of $165
Finally there are total costs are of $985
Understanding the difference between fixed and variable costs is key to managing business finances more effectively. This understanding also supports decisions regarding business expansion or cost reduction, according to the financial condition and business goals.
Greetings @khursheedanwar
1.- You have shared the relationship between costs and financial accounting. Both address production functions, expense records are taken into account to facilitate decision making.
2.- You have presented the differences between variable and fixed costs. Although both are immersed in the same production environment, one directly influences the product, these are the variable costs; This means that, if production increases, variable costs will also increase and/or vice versa. while fixed expenses are periodic expenses that do not vary in the short term.
3.- You have identified the elements of the cost of a fictitious case. An entrepreneur must be clear about these factors for decision making and optimization of resources.
4.- You have made the example and presented it through a table. It is important to be clear that delivery costs are not related to direct costs, but to indirect manufacturing costs.
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