Current costs of the organization: definition, calculation features and types

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Costs are classified according to their purpose. In theory and in practice, a clear distinction between them acts as a determining factor in the effectiveness of work. At all stages of management, costs are grouped, the cost of goods is created. Along with this, the appropriate sources of income are determined. Let us further consider what the current costs of the enterprise are.

Cost classification

Expenses of an economic entity are divided into three categories. In particular, allocate:

1. Costs for the production and sale of products. They constitute the current costs of the organization. They are covered from the profits received from the sale of products through the circulation of working capital.
2. The cost of updating and expanding production. Typically, these costs are one-time and amount to fairly large amounts. At the expense of them the equipment, technologies are improved, the authorized capital increases. They include capital investments in fixed assets, the formation of additional labor resources for the production of new products, the cost of current repairs, etc. Thesecosts are financed from special sources. These include, in particular, the sinking fund, the issue of shares, loans, profits, and so on.
3. Costs for housing, social, cultural and other needs. These costs are not directly related to production. They are financed from special funds. They are formed from distributable profits.

Capital and current costs are directly related to the production and sale of products. They affect the activity of an economic entity in different ways, but they are equally important for achieving the set goals.

Running costs

Expenses in this category account for the largest share of all costs of the subject. They include funds allocated for material and raw materials, financing of fixed assets, wages, and so on. Operating costs are returned at the end of the production and marketing cycle of products and are included in revenue.

Accounting purposes

Current production costs are reflected in accounting documents. The key objectives of cost accounting are:

1. Control costs and profits.
2. Providing efficiency and savings.
3. Development of accounting information for analysis and management decisions.
4. Ensuring the accuracy, timeliness and completeness of information.
5. Correct taxation.

Principles

Running costs are accounted for based on a number of basic assumptions. Reflection firstinformation should correspond to the goals of improving the activity of the subject. To ensure the comparability of different costs, a single nomenclature of articles is being developed. It makes it possible to cover various operating costs. The production of products, their sale, the purchase of materials, raw materials, etc., are thus reflected using uniform designations that are understandable to all departments. The nomenclature of items is also used when allocating costs to classification groups.

Analysis

Each economic entity must evaluate the effectiveness of current costs. The assessment is carried out in terms of rationality and the availability of opportunities for savings in the current and future periods. Current costs will be optimal if they contribute to the improvement of the end result - a continuous increase in turnover and profit. To implement this task, you need:

1. Estimate the amount of costs in the amount and percentage relative to revenue and profit for the past period. Compare the results obtained with the indicators of other entities (especially competitors), as well as the amount of costs for the industry and the region as a whole.
2. Study the costs of individual items. As a percentage and in total, establish their share in the total current costs for the period, evaluate the dynamics of changes in this share.
3. Establish savings reserves in cost items separately, determine how to use them.

Variable and fixed costs

This classification is of great practical importance. Variable current costs decrease or increase in proportion to the volume of output. They ensure the purchase of materials and raw materials, energy consumption, transportation, trade commissions and other costs. Fixed current costs do not depend on the dynamics of production volume. This category includes depreciation, interest on a loan, rent, utilities, administrative costs, and so on. There is also a separate category of semi-fixed (variable) costs. Their change is not directly proportional to the volume of output.

Indirect and direct operating costs

The unit cost can be calculated using the absorption method. It involves adding up all the costs of issuance. Cost information serves as the basis for determining the size of work in progress, financial results, and the volume of inventories. It allows you to analyze the profitability of individual products, their groups, as well as the productivity of departments. In accordance with the results, a decision is made on the expediency of a subsequent release or work. The cost figure is also used in the pricing process, especially when determining the regulated cost.

Application Features

Earlier, the absorption method was quite widespread in the planned economy. With its help, management decisions were made at full capacity utilization and lack of price competition. Currentlythe situation has changed. In particular, the capacity utilization of an enterprise is determined by the demand for products. It, in turn, largely depends on the price. To determine the value of the cost for a given volume of production is possible only at the end of the reporting period. Meanwhile, the manager needs this indicator already at the stage of assortment planning.

Cons of the method

From the above, it follows that the key drawback of the calculation by full absorption is the lack of relationship between the size of costs and production volume. In addition, the following disadvantages can be distinguished:

1. Necessity to apply bases for the distribution of indirect costs by type of product. The selection criteria for the latter are rather vague. The set of valid bases is rather limited.
2. In connection with the distribution of indirect costs for products, changes in stocks of finished products in warehouses will affect profits. With the accumulation of volumes of illiquid goods, an economic entity will receive an increase in its calculated value.

The above disadvantages can be completely avoided by using the method of dividing costs into fixed and variable. In this case, only the latter will be included in the cost of inventory. In this case, fixed costs are included in period costs. As a result, profit is removed from dependence on changes in inventory.

Cost structure

The costs that form the cost price are divided depending on the economic content into:

1. Material.
2. Wages.
3. Depreciation of fixed assets.
4. Deductions for social. needs.
5. Other expenses.

The structure of these groups depends on various factors. In particular, it is influenced by the nature of manufactured products and the materials and raw materials used, the technical level, forms of organization, location of production, conditions for the supply and sale of goods.

Material costs

In all economic sectors, these costs account for the bulk of the cost. Inventories include semi-finished products, raw materials, energy, fuel, and so on. Some of these objects are processed or assembled. This applies in particular to semi-finished products and materials purchased from third parties. The allocation of energy and fuel in the composition of resources is determined by their national economic significance. Material costs also include the cost of packaging, containers, spare parts, tools. Resources are assessed based on the purchase price (without VAT), surcharges, commissions to foreign trade, supply and intermediary entities, customs duties and a number of other indicators. Material costs exclude the cost of residual heat carriers, semi-finished products, raw materials that are formed during the production of products and partially or completely lose their consumer properties and, accordingly, cannot be used further.

Wages

The cost of it reflects the participation of human labor in the formation of the cost. These costs include the salaries of key personnel, as well as employees,who are not in the state, but are involved in the production of products. Salary consists of:

1. Salary, which is charged at tariff rates, piece rates, official salaries according to the calculation system adopted by the company.
2. Value of products given as payment in kind.
3. Additional payments and allowances.
4. Performance Awards.
5. Payment for additional and regular vacation days.
6. Costs of services provided free of charge.
7. Lump-sum service awards.
8. Extras for work in the Far North.
9. Other expenses.

Other Items

Deductions for social. needs are a form of redistribution of national profits to finance social needs. The funds are directed to the relevant off-budget funds and have a specific purpose. Depreciation is included in the cost in amounts that are calculated in accordance with the book value of fixed assets and existing norms. Depreciation is accrued both on own objects and leased ones (unless otherwise specified in the agreement). Other expenses include a variety of expenses. These include, in particular, fees and taxes, deductions to funds, amounts of insurance premiums, payments for environmental pollution, payment of interest on loans, hospitality and travel expenses, payment for work related to certification, remuneration for rationalization, invention, and so on..