Cost element

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.

Cost

Due to accounting cost is a cash value of expenses for raw materials, equipment, supplies, services, labor, products, etc. All of the spending must be reported and saved by accountants.

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.

Cost Planning

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.

Model Plus

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)

See also:

• Costing system
• Cost center
• Revenue center
• Project cost management
• Types of logistics costs

Examples of Cost element

• Personnel cost: Personnel cost is the cost of salaries, wages, and benefits for employees. This cost element includes all direct and indirect personnel expenses, such as payroll taxes, bonuses, and other compensation.
• Materials cost: Materials cost is the cost of goods used to produce a product or service. This cost element includes the cost of raw materials, purchased parts, and supplies used in the production process.
• Equipment cost: Equipment cost is the cost of equipment and machinery used in the production process. This cost element includes the cost of purchasing, maintaining, and operating equipment and machinery.
• Logistics cost: Logistics cost is the cost of transportation and storage of goods. This cost element includes the cost of shipping, handling, and storing goods.

Advantages of Cost element

Cost element is an essential part of the budgeting and expenses management process, as it allows to assign costs to particular factors. Here are the main advantages of cost elements:

• Cost element enables an organization to track costs accurately, as it helps to identify the expenses and assign them to the related factors.
• Cost element can help to identify the areas of an organization that require more resources or need to be improved.
• Cost element can be used to develop strategies for cost reduction, as it will allow to analyze the costs of each factor and identify the areas with excessive expenses.
• Cost element can be used to determine the profitability of a project, as it will enable to track the costs of each factor and compare it with the potential profit.
• Cost element can be used to forecast the expenses and budget, as it will enable to create an accurate forecast of the expenses.

Limitations of Cost element

Cost elements have several limitations, which should be taken into consideration during budgeting and expenses management process. These limitations are as follows:

• Incorrect assignment of cost elements - It is important to assign cost elements correctly to ensure that the budget is accurate and reflects the actual cost of the project.
• Inadequate tracking of cost elements - It is difficult to keep track of cost elements when they are assigned to different factors. This can lead to budgeting errors.
• Inaccurate data entry - When cost elements are entered incorrectly or incompletely, it can lead to inaccurate reporting and budgeting.
• Lack of visibility - When cost elements are not visible to all stakeholders, it can be difficult to track costs and make informed decisions.
• Unrealistic budgeting - When cost elements are not properly taken into account in the budgeting process, it can lead to unrealistic budgeting and the inability to meet financial targets.

Other approaches related to Cost element

Cost element is a part of charges, that during the budgeting and expenses management process is assigned to particular factors. Other approaches related to cost element include:

• Activity based costing: This approach identifies activities that cause costs and assigns them to specific products or services. This approach allows for better understanding of the cost structure and can help organizations to improve efficiency, reduce costs and improve product quality.
• Process costing: This approach involves assigning costs to each process in a production system. This approach is used to measure the cost of producing a product or providing a service.
• Target costing: This approach is often used in industries where products are highly competitive and/or have short life cycles. It involves setting a target cost for a product and then taking steps to reduce the cost of producing the product to meet the target cost.
• Value chain analysis: This approach involves analyzing each stage of the production process to identify points where cost can be reduced.

In summary, cost element is a key element in the budgeting and expenses management process. Other approaches related to cost element include activity based costing, process costing, target costing, and value chain analysis, all of which can help organizations to reduce costs and improve efficiency.

Footnotes

Cost element — recommended articles

Types of logistics costs — Functional budget — Landed cost — Costing system — Product cost — Activity-based management — Absorbed costs — Distribution cost — Cost per unit

References

• Blocher E. J., Stout D. E., Cokins G., (2010). Cost Management : A Strategic Emphasis, 1-5; 63-91; 180-230; 273-320.
• Fang Y., Ng T., (2011). Applying activity‐based costing approach for construction logistics cost analysis, "Emerald Group Publishing Limited", v. 11, 259-281.
• Kurzban R., Duckworth A., Kable J. W., Myers J., (2013). An opportunity cost model of subjective effort and task performance, "Cambridge University Press", v. 36. 661-679.
• Roy R., Souchoroukov P., Shehab E., (2011). Detailed cost estimating in the automotive industry: Data and information requirements, "International Journal of Production Economics", v. 133. 694-707.
• Ruiz-de-Arbulo-Lopez P., Fortuny-Santos J., Cuatrecasas-Arbos L., (2013). Lean manufacturing: costing the value stream, "Industrial Management & Data Systems", v. 113. 647-668.

Author: Anna Zalewska