Company Costs

Company Costs related articles

Company Costs

27.02.2008 ob 14:00

It may happen that the costs in your company increase until you are in over your head. You find that you have simply lost control over the costs, inflows and outflows - you find yourself in a financial chaos. This does not mean that your business is not generating profit and that you are at risk of incurring a drop in turnover or even a loss! However, a precise and continuous control of the company costs may increase your profits. This allows you to optimize your company’s operations and invest the bigger profits safely so as to increase your capital. Of course, it all depends on the transparency of business operations, which keeps your money from leaking through the cracks you do not even know exist in your operations.

Costs depend on the scope (amount) of business operations. Therefore, they represent a function that is dependent on the scope of business operations, or, if we look at it from the mathematical-economic point of view, costs are a dependent variable, while the scope of business operations represents the independent variable. Each company generates fixed and variable costs that are dependent on the scope of business operations. These are overhead costs and can be classified further into total, average, incidental and marginal costs.
Fixed costs are not directly dependent on the scope of business operations, which means that a company generates them within a certain specified short period of time even when it is not in business. These costs include, for example: rents for business premises, general liability insurance for businessesand other types of insurance, debt interest, business premises heating and lighting costs, depreciation in case of time-based depreciation methods, personnel salaries/wages fixed by collective labour agreements, etc. Notwithstanding the scope of business operations, the amount of these costs is invariable. Naturally, practice shows that it is not realistic to characterize a cost as being absolutely fixed. Costs can be absolutely fixed only within the limits of the given capacities. If a company wishes to expand the scope of operations beyond the limits of its existing capacities (e.g. expansion of activity, the need for bigger working areas or number of employees), it needs to develop them, which may cause a leaping increase of fixed costs. Following such a development, the costs are again fixed, but on a higher level, until the company encounters the upper limit of these new enhanced capacities. That is why instead of speaking of absolutely fixed costs we use the term relatively fixed costs.
Variable costs, on the other hand, are dependent on the scope of business operations and increase proportionally with the increase of the scope of operations. They include, for example: material, energy, personnel salaries depending on the effects of their work, etc. They are classified into three groups according to the way they increase: progressive (advancing), proportional (linear) and regressive (receding). It is characteristic of the progressive costs that they increase faster than the scope of operations does. The proportional costs increase with the same speed as the scope of operations. Therefore, they increase at the same rate as the scope of operations. Regressive costs increase slower than the scope of operations.
Total costs represent the sum of the fixed and variable costs. In the field of cost management, modern literature frequently uses the term »mixed cost«, designating the fact that a particular cost can have its fixed and its variable components (e.g. electricity costs, where the connected load represents the fixed cost and electricity consumption measured by the electricity meter the variable cost).
Average costs are the costs per unit of a product. They are calculated by converting the company costs pertaining to the entire scope of business operations into a cost for one unit of the business effect. These therefore represent an accurate result or indicator of business performance, a guideline indicating whether our operations are stable, whether we are conducting our businesses better or poorer.
Incidental costs are the costs pertaining to an additional scope of business operations at the existing company’s capacities. Marginal costs are additional costs distributed according to the additional scope of operations. By definition, both incidental and marginal costs fall entirely under variable costs according to their origin.

In order to achieve effective and efficient operations, each company endeavours to control the costs of its operations to the highest degree possible. At first, it is important to be familiar with all the functions of an organization that are necessary for optimum operation and costs necessary for the performance of these functions. Only through knowledge and the transparency of all the required costs can we decrease the costs while maintaining the same capacities and the same results of our company. For example, we could decrease the company costs by lowering the fixed costs: first, we could relocate our business operations into less expensive business premises (from the city centres to the outskirts where the cost of renting business premises is considerably lower). You could buy state-of-the-art equipment to minimize the risk of errors, which allows us to lower the amount of the insurance premium on the insurance policy. In company operations, you could make use of "outsourcing" in those working areas where opening a new position for performing tasks would only mean bigger costs, and there are other solutions as well. To summarize, each company strives to increase company efficiency and decrease the costs, but not at the expense of worse working conditions and company results. To achieve this, it is crucial to apply sophisticated techniques for controlling the costs.

Urška Č.

translation by alkemist d.o.o.


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