We explain what the cost is, what types exist and differences with expenses. Also, cost accounting and production costs.
What is the cost?
The cost, also called cost, is the economic outlay made for the production of some good or the offer of some service. The cost includes the purchase of inputs, payment of labor, production expenses and administrative expenses, among other activities.
There are different types of costs and the way they are calculated in a company or organization may vary.
See also: Economy of scale
Types of costs
Costs can be classified according to various criteria:
According to their behavior:
- Fixed costs. They are those costs that a company has beyond the production obtained, that is, their value does not vary depending on what is produced. Fixed costs can only be stipulated in the short term, since they eventually vary over time. Some examples are: rent payments and taxes.
- Variable costs. They are those costs that vary in relation to what is produced, that is, if production is increased these costs will be higher and vice versa. Some examples are: the amount of raw materials used, the packaging and packaging of the products.
- Semi-variable cost. They are those costs that can vary depending on what is produced, but these changes are rather progressive.
According to the relationship between the factors of production and the products:
- Indirect costs. They are those costs that have consequences on total production, that is, they cannot be assigned to a specific product. The costs must be distributed equitably among all goods produced. For example: the increase in factory cleaning supplies or the increase in workers' salaries.
- direct costs. These are those costs that can be assigned to each particular good or service. For example: the increase in flour (which has a direct impact on the production of bread) or the increase in ink (which impacts the production of books).
According to its nature:
- Labor costs They are those costs that derive from the payment of salaries of all the members who participate in the production process and all those who are part of the business structure.
- Raw material costs They are those costs incurred when acquiring raw materials to make a certain product.
- Financial costs They are those costs that are needed to finance the business.
- Distribution costs They are those costs that occur in the product distribution system.
- Tax costs They are those costs related to the payment of taxes.
Cost and expense
Cost and expense are two concepts that are often taken as synonyms, but in accounting they differ substantially.
The cost is defined as all those investments necessary for the production of the good or service, such as: labor, raw materials. Costs are considered investments since they are expected to return as a form of profits for the company.
The expenses are all those payments that the company must make for aspects that have nothing to do directly with production such as the payment of salaries of administrative staff. These expenses are those that allow the correct functioning of the company, but are not directly related to profits.
Examples of costs
Examples of fixed costs
- Internet service
- Payment of salaries
- office rental
- Electricity, water and gas service
- Insurance contracting
- Municipal permits
- Taxes
Examples of variable costs
- Raw material
- Labour
- Packaging and packaging
- Distribution
- Commissions on sales
Production costs
Production costs are all the investments that a company makes to produce a certain good or provide a service. Some key elements within the production cost are: raw materials, labor, and general manufacturing costs. Production costs can also be divided into fixed costs and variable costs. The sum of these two costs will result in the total production cost.
The company generates profits when income is greater than production costs and generates losses when production costs exceed the profits obtained from the commercialization of the good or service.
Cost accounting
Cost accounting is an area within accounting in which accounting techniques are used to record, analyze and distribute the costs used in production of a certain good or service. This analysis of total costs allows us to know the cost per product.
Cost accounting is a fundamental piece within the accounting area of companies or organizations. This process uses basic accounting principles to then make use of the information obtained. The analysis of these costs allows them to be managed and administered. They provide precise information that Contributes to planning and decision making within the organization.
Continue in: Cost accounting
References
- “Main types of costs in a company” in CERTUS.
- “Cost classification” in Accounting only.
- “How to calculate production costs?” in Destination Business.
