The accounting of costs

The accounting of costs consists of the identification and measurement of the monetary payments which a business or company incurs, being understood the term payment as the consumption of goods, depreciation of assets, etc., and not only like exit of money.

The objective of the accounting of costs is the one to provide information on the costs which a business is incurring generally, a certain product, a certain area, etc., with the purpose of to obtain a better financial situation analysis of a business.

We can enter the costs, for example:

• of a business generally, with the purpose of to obtain an express Earnings statement, and not to have to wait for the Earnings statement of the end of the period done by the general accounting.
• of the product or service that we offer, with the purpose of to find its cost of sales, and to thus be able to know its utility gross (sales - sale cost), also, before having to wait for the Earnings statement of the end of the period.
• of each product that we produce, in order that comparing them with the income that each generates, to know the yield each and, for example, to know which are most profitable and which do not generate utility.
• of a certain product so that, determining which is the utility that we want to win, to be able to define its price.
• of a certain area or department of the business, with the purpose of to know its yield and, for example, to know if the income that it generates are majors that its costs.
• of a certain client, with the purpose of to know if what we spent in maintaining this client turns out to be greater than the income than it generates to us.

Unlike the general accounting, the accounting of costs is only of internal use and it does not have obligatory character, reason why it does not exist a system or standard method of costs for all the companies, but each company can adapt the system or more advisable method according to its needs or objectives.

We see next the general steps to enter the costs in a business or company:

1. Total costs or Partial Costs

In first place we determined what elements we are going to consider like costs; in case we want to enter the total boundaries of a business, two methods exist: the method of the Total Costs and the method of the Partial Costs.

Total costs

This method consists of taking like costs to all the payments related to the product, including the expenses of sales and administration, and denominating expenses to all the others (financial expenses, taxes, etc.). This one method usually is used to find the balance point.

Partial costs

In this method it is considered like costs to all the related payments a:

• the acquisition of merchandize: in the case of a marketing company (company dedicated to the purchase and sale of products).
• the manufacture of the product: in the case of an industrial company (company dedicated to the production or product manufacture).
• the benefit of the service: in the case of a company of services.

Denominating expenses to all the others (administrative expenses, financial expenses of sales, expenses, taxes, etc.). This one method usually is most advisable and easier to use.

2. Fixed Variable costs and or Direct and Indirect Costs

Once or we have decided what payments we will take like costs, for a better analysis, we happened to classify them in Variable Costs and Fixed Costs, or in Direct Costs and Indirect Costs.

Variable costs and Fixed Costs

In this case we classified our costs according to its behavior in relation to the fluctuations of the activity:

• Variable costs: these costs vary in agreement with the changes in the activity levels, are related to the number of sold units (in the case of a marketing company), volume of production (in the case of an industrial company), or number of services realized (in the case of a company of services); variable examples of costs are the costs incurred raw material, combustible, wage per hours, etc.
• Fixed costs: they are costs that are not affected by the variations in the activity levels; examples of fixed costs are the rents, depreciation, insurances, etc.

When it increases our production, they increase our Costs Variable, but not them Fixed Costs nor the unitary Variable Cost, for example, if we produce 10 products with 400 a Variable Cost of and a Fixed Cost of 190:

Total costs	2000 (400 + 190)
Unit cost	200 (2000/10)
Unitary Variable cost	40 (400/10)
Unitary Fixed cost	160 (190/10)

If our production increases in 10 products:

Production: 20, Variable Costs: 800, Fixed Costs: 190

Total costs	2400 (800 + 190)
Unit cost	120 (2400/20)
Unitary Variable cost	40 (800/20)
Unitary Fixed cost	80 (190/20)

Direct costs and Indirect Costs

In this case we classified our costs in agreement with the identification with the intention of the cost.

• Direct costs: these costs directly take part in the elaboration of the product or service, or are part of the same; in order to be able to identify them, we see which costs are those that can be distributed between products, for example, the raw material (because it is known how much of raw material it is used for each product), the electricity (when it is known how much of electricity it is used for a certain product), etc.
• Indirect costs: they are costs that take part indirectly in the manufacture of products or the benefit of services, to be able to identify them, we see which are those that cannot be distributed between products, for example, the electricity.

3. To determine Expenses

Once we have decided what payments we will consider like costs (method of the Total Costs or the Partial Costs), and that we have classified them in Variable Costs and Fixed Costs, or in Direct Costs and Indirect Costs, we happened to identify our Expenses (that would come to be all the payments that we have not considered like Costs).

We can classify them to the expenses in:

a. Operative expenses

Which can can as well be:

• Expenses of Sales: they are payments that are related to the activities of commercialization of products, for example, the labor expenses (pays, allowances, commissions of the head of sale, the salesmen or the collectors), publicity, tax to the sales, packings, transports, storage.
• Administrative expenses: they are payments that are related to the management activities, for example, labor expenses (pays, allowances, insurances of the managers, administrators, aids of the company), rents, materials and equipment of office, insurances, depreciation (of administrative buildings, equipment of office, machines, furniture), imposed.

Note: when we used the Method of the Total Costs, the Operative Expenses are considered like costs.

b. Financial expenses

They are payments that are incurred for the financing of the operations (I interest).

c. Other Expenses

Payments such as losses, uncollectable, unexpected, etc.

4. Identification and analysis

And, finally, once or we have determined that elements we are going to consider like costs we have classified, them, and we have determined our expenses, we happened to identify each element with its respective cost, and later, happened to analyze them, according to the necessity or to the objective that we must to enter our costs.

In order to see examples of how finding and analyzing costs, we invited to you to read articles Costs in a marketing company, Costs in an industrial company and Costs in a company of services.

Image: Darren Hester