Cost element is a part of charges, that during the budgeting and expenses management process is assigned to particular factors. For example, production deliveries are the cost element, included into production process factor. Then elements are categorized and correlated to types.
Establishing cost elements
Cost elements are established in order to concert and adjust expenses and bring into the books financial accounting, controlling and management accounting. For each element there is a category amended which is determined by the transaction type.
We feature many types of cost elements, for example Primary Cost Elements, Secondary Cost Elements and Revenue Cost Elements. Main use of cost elements is integration between financial accounting and controlling as all the expense accounts in Financial Accounting must have its equivalent in controlling. The requirements are per coordinating expenses in Financial Accounting and primary costs in Management Accounting.
Types of Cost Elements
As per cost elements the most important types featured are:
- Primary Cost Elements- we are identifying the background of the cost by taking an object from Management Accounting. For example, salary costs and material costs.
- Secondary Cost Element- those are used only in Management Accounting to relate internal costs flow. For example, evaluation and reckoning. The Secondary costs are used only in Management Accounting as there are no equivalents in Financial Accounting.
- Revenue Cost Elements- while analyzing incomings in cost controlling, those are identified as revenue cost elements and can be considered as primary cost elements.
Automatic Creation of Cost Elements
In order to have costs elements created automatically accountants amend standard settings consisting of either cost element or factor of the elements. Then they put in the cost type that required for each element.
Basic costs are registered as per account book and figure of operations. Element's name is taken from financial accounting account data.
Additional cost elements are determined for all the defined by accountant charges. Those are described by the cost element category. After creating the settings the costs elements are assigned to correct category.
Types of costs
There are many types of costs, but as accountants focus on two main kinds:
- variable costs- those are mostly affecting financial part of the business, in terms of production process and delivering the goods. These costs are assigned to ordering, transiting and handling raw materials. Variable costs are considered in the final amount as per special conditions such as temperature of warehouses, etc.
- direct costs- those are also important as per stages of establishing yarn-over of the goods. To calculate direct costs, we consider time and effort consumption put into forming the product or service. For example, hours of labour required for production.
Once business plan is wrought, the entrepreneurs develop cost estimates. The values are used to estimate viability, profitability and if the revenues will cover charges and expenses. This process is also known as cost-benefit analysis. Accuracy is really important as underestimating charges may cause crossing profitability borders. In a short period of time it is normal for the business to invest more money that the income is, but in a long run the company may collapse.
Cost plus model is really popular system used by many companies to establish price for products supplied. In order to calculate the cost, this model takes into account the cost of cost of manufacture and markup.
P = C + X Where:
- p- price
- c- manufacturing cost
- x- markup (in percentages)
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Author: Anna Zalewska