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Cost is expressed as a nominal consumption of fixed and current assets, services, investments of work and certain expenditure that are not the consumption (taxes, social security) associated with the operation of normal activities by the enterprise in a specific period of time.

Otherwise you may find that the cost is expressed as a nominal consumption of fixed (fixed assets, intangible), work inventory, services and work, and certain expenditures not reflecting consumption, that are related to the running of a typical enterprise's activity at a given time. The cost incurred in the ordinary course of business are diverse, so their classification is made according to different criteria.

Types of costs

Social and consumer costs

  • social costs - costs paid by society related to enterprise activity, e.g. costs of medical treatment if the product caused harm.
  • consumer costs - costs paid by consumer related to using the product, e.g. cartridge to printer or repairing broken product.

Those types of costs are difficult to count. According to Genichi Taguchi they are the loss to the society caused by product. See also quality costs.

Manufacturing and non-manufacturing costs

  • manufacturing costs - direct material cost, direct labour cost, manufacturing overhead cost.
  • non-manufacturing costs - selling and distribution costs, administrative costs.

Opportunity cost (economic cost, alternative cost)

The term is used in decision-making. Opportunity cost is the value of best alternative that was not chosen. It represents opportunities that are no more available due to decision made.

Marginal cost

Marginal cost is the change in total cost that arises when quantity produced is increased by one. In other words, it is cost of producing additional unit. The marginal cost is important for company management, because up to some point producing each next unit is cheaper, however behind this point cost become to grow. If enterprise produces at lowest marginal cost is gains economies of scale. See also: marginal revenue.

Costs systems

Costs of the ordinary operating activities can be recognised in the following standard agreements:

  • the generic system costs
  • the calculative system costs

Generic system costs

Generic system divides the cost from the point of view of their content. These include:

  • Depreciation - the cost for the planned write-offs of consumption of fixed capital and intangible assets
  • Material and energy consumption - includes consumption of raw materials, primary and secondary materials, semi-finished products, packaging, fuel, electricity, heat, water.
  • Services rendered by other units, transport services, repair services, repair and maintenance of fixed assets.
  • Taxes and charges - taxes from property cost, means of transport,
  • Value added tax (VAT) charged not recoverable, stamp taxes, notary.
  • Remuneration - gross pay for work done on behalf of the entity, regardless of the nature of the employment relationship.
  • The benefits to employees, employees insurance, training
  • Other costs - e.g. cash equivalent to individuals not counted in wages or benefits for employees.

Calculative layout

This is a structural layout of costs, primarily used for planning. It makes two basic categories:

  • direct costs - those that show a direct relationship with the production of a particular product or the provision of a particular service,
  • indirect costs - associated with a wider range of activities of the company.

See also: