The costs: their types and their grouping

Types and grouping of costs

By cost, we most often mean production-related expenses. However, you need to interpret this more broadly if you want to be stable in the long run.

A given cost has multiple properties, so a given expense can be included in multiple groups. Because there are countless and even more grouping modes, this article will only review frequently used groupings that you may want to be familiar with.

For you, knowing the costs and their characteristics is important both for maintaining the stability of your business and for preparing your future financial plans. This plan will also include your budget, which may change during the year as a result of any unforeseen events, but will at least give you a broad idea of what you will need in the coming period.

Why is it important to monitor costs?

Tracking your expenses is not a “gentleman’s passion”. You must be able to pay a portion of these expenses by a certain deadline, otherwise you will either pay a penalty / late payment interest or you may liquidate your company. That is, by planning and tracking, you are doing nothing more than helping to keep your own liquidity.

Profitability indicators help you more easily see the impact of costs on your company’s life and earnings, and efficiency indicators help you get an idea of how well you’re using your resources.

How much do you know about businesses?

Economic and accounting costs

The accounting cost: the total explicit cost + the implicit cost that can be accounted.

Economic cost: total costs (explicit + implicit total)

Explicit costs

Costs that are paid directly by the company and supported by an invoice or some other document. It can be either fixed or variable, but it is definitely a clearly identifiable amount.

Implicit costs

Implicit costs cannot be supported by an invoice directly, so only part of them can be accounted for as costs. They do not involve a direct cash outflow.

Eligible costs: the implicit cost that can be accounted for is depreciation.
Ineligible costs may be e.g. the owner’s work or the use of a means of production for charitable purposes, but includes income that has been lost for some reason

Grouping of costs by appearance

Material expenditure

In this group, your expenses that were incurred for production are displayed. It includes:

the value of the materials purchased and used: you either incorporate them into the finished product or use them in other ways
the cost of goods sold (COGS): differs from the previous point in that here you resell the same goods in the same form (if you slice, measure, you do not change it, you only make it suitable for sale)
value of services used (ie purchased): e.g. telephone costs, shipping costs, etc.
value of services sold: as with goods, there may be resale in the same form for services, the cost of which is included.

Personnel expenses

You keep track of your expenses related to your employees here. Three items appear here:

Wage cost: gross wages, bonuses, rewards, allowances, anything that an employee is entitled to, either legally or under his or her employment contract.
Other personnel costs: a benefit given in addition to the wage cost, such as e.g. the meal contribution
Wage contributions: the place of all contributions paid on wages

Depreciation

Anything you use loses its value during use. During normal operation, you can’t express this with invoices (it would be difficult to ask anyone for an invoice every year for a building, for example, due to wear and tear), but even more so with numbers.

Depreciation increases your costs, meaning your profits decrease.

Grouping according to their relationship to production

Fixed costs

Its extent does not change, it is completely independent of the amount of emissions. Such as e.g. site insurance premium

Variable costs

Cost entirely dependent on the volume of production. The more you produce, the higher. Eg raw material cost

When planning, keep in mind that variable costs rarely change in direct proportion. As you can see in the image below, the more you produce, typically the faster these costs increase.

linearly increasing variable cost: such as e.g. the cost of raw materials. 2 finished products will require 2x as much raw material, 10 finished products will require 10x as much
progressive variable cost: until you reach the point where it is no longer worth producing, your cost will increase more and more. These can be e.g. the wage if you either ask your employees for overtime or you hire extra labor due to overproduction
degressive variable cost: the more you produce, the smaller their proportions will be. These can be e.g. costs related to material handling, or even maintenance costs (provided you are operating normally and you do not ruin your production machine with the extra work)

Semi-variable costs

There is a minimum amount that arises fixed but increases as production increases. Such a cost e.g.

wages, you keep and pay employees during downtime,
fees for certain services: system usage fees are fixed every month, in addition to which there are increases due to actual usage

Total cost

The combined value of variable and fixed costs. This is taken into account when planning the hedging point.

Avoidable costs

If you stop production, you don’t have to pay for some items. e.g. raw materials, performance wage and part of the overhead. Discontinuation of production is definitely justified if you do not reach the break-even point. That is, in the above picture for the parts before and after the gray rectangle.

Unit cost

The average cost per 1 output produced. This, of course, will change with each additional production. The extent of the change is shown by the marginal cost.

Marginal cost, help in planning variable costs

It helps you plan your costs. It shows how much +1 unit production increases your costs. From this, you will also see how quickly your expenses increase relative to your revenue increase.

By depicting this, you will see that the return on cost increases is positive for a while and then decreases more and more. The point where it changes from positive to negative is called the inflection point.

Grouping by place of origin

Direct cost

At the moment of release, you will know why it even occurred. Such a cost e.g. the cost of materials incurred in production, without production cannot begin.

Indirect cost

It is needed for production and operation, but you cannot say clearly which product or service they are specifically related to. Such can be e.g. the salary of the staff performing the administration, or just the fee for cleaning your buildings.

No more in accounting, but additional costs used in planning

Sunk cost

Costs you can’t extract. e.g. you spent money on advertising to enter a new market, but you stepped back. Then the cost of the ad is a sunk cost.

The cost of the opportunity

The amount of money you produce could produce it elsewhere. The profit that you could achieve here but not generated is the cost of the opportunity.

Questions:

What method do you use to plan your expenses?
How do you group your own expenses?
How long do you plan ahead with them?

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