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Use the following formula to calculate the cost of the business. You will find this information from the business's income statement in the company's financial statement set for the specific accounting period.
- {Cost of the business} = {Cost of goods sold} + {Operating expenses}
From the income statement of a business, you can only see the total cost, but you have to find out what its details include and where it came from to see that your money was. where it flows, whether it is effective or not.
Business expenses
Businesses must keep track of related costs incurred when businesses are operating and related costs incurred when businesses are inactive.
- Because profit is determined by the revenue the business earns minus the amount it runs, profits can be increased by increasing revenue and reducing operating costs. Because cost cutting often seems to be an easier and more accessible way to increase profits, managers will often quickly choose a cost-cutting method.
- However, cutting operational costs too much can reduce the productivity of the business and therefore, the profitability of the business is also reduced. While reducing any specific operating costs will often increase short-term profits, it can also affect the profitability of the business in the long run. For example, if a business cuts its advertising costs, their short-term profits will likely improve, as they are spending less money on operating costs. However, by reducing advertising, businesses can also reduce the ability to generate new revenue and profit in the future may be affected.
- Ideally, businesses should find ways to keep operating costs as low as possible while maintaining the ability to increase sales. In order to do this, managers need to understand operational costs and how to manage operating costs effectively.
Cost of goods sold
- The cost of materials directly
- Cost of renting a factory or manufacturing facility
- Salary for production workers, production managers
- Depreciation of machines and equipment
- Cost of repairing machines and equipment
- Electricity and water costs used for production facilities
- Consumption costs for the use of production facilities
Types of operating costs of the business
Operating expenses of an enterprise include the following types of expenses:
- Salary for management department
- Salary for accounting and tax declaration department
- Salary for personnel management department, labor and insurance wages
- Salary for the legal department
- Selling and marketing expenses
- Bank charges
- Travel expenses
- Entertainment and communication costs
- Research and development costs
- Office rental costs
- Expenses for consumer consumption in the office
- Cost of repairing and maintaining office machines
- Cost of electricity, office water
Fixed and variable costs
Fixed costs (Fee)
Fixed costs are those that do not change with an increase or decrease in sales or productivity and must be paid regardless of the business performance or performance. For example, a manufacturing enterprise must pay rent for factory premises, no matter how much it produces or makes. While it is possible to narrow and reduce the cost of renting your rent, these costs cannot be eliminated and are therefore considered fixed costs. Fixed costs usually include initial investment costs, property insurance, security and installation facilities.
Fixed costs can help achieve economies of scale, because when more of your business costs are fixed, businesses can make more profit per unit because it creates more units. than. In this system, fixed costs are spread evenly across the number of production units, making production more efficient as production increases by reducing the average variable cost per unit of production. Economic scale can allow large businesses to sell similar goods to smaller businesses at lower prices.
Economies of scale-based may be limited in that fixed costs often need to increase with certain standards in production growth. For example, a manufacturing enterprise that increases production rates over a defined period will eventually reach the point where it is necessary to increase the size of the factory space to accommodate the increase in product output.
Variable costs (Variable costs)
Variable costs, also called variable costs, include costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decreases as production declines. Examples of variable costs include material costs, wages and electricity costs. For example, for a fast-food restaurant chain to sell chips to increase sales, they will need to increase the cost of buying potatoes from the supplier.
Sometimes, a business may achieve a discount or a discount when buying supplies in bulk, where the seller agrees to slightly reduce the cost per unit in exchange for a regular buyer's purchase agreement. buy in bulk. Therefore, this may partially reduce the correlation between increasing or decreasing output and increasing or decreasing variable costs of the firm.
Volume discounts often have a relatively small effect on the correlation between variable costs and variable costs and the nature of change in the variable production level is constant.
Typically, firms with a high ratio of variable costs to fixed costs are considered to be less volatile, as their profits depend more on sales. Except for manufacturing and transport enterprises that have large fixed investment costs, most of the trading, construction and service businesses have high variable rates. However, this is changing in the competitive environment and the application of information technology has led these businesses to invest more in fixed costs to easily expand and control the quality of supply. .
Selling variable cost
In addition to fixed and variable costs, a firm's operating costs can also be considered selling variable costs (or selling fixed costs ”).
These costs represent a mixture of fixed and variable components, so it can be thought of as a coexistence between fixed costs and variable costs. reduce in production, as variable costs, but persist when production is zero, as fixed costs. This is a key factor distinguishing variable selling costs from fixed costs and variable costs.
An example of variable selling costs is overtime pay. Regular salaries for workers are often considered as fixed costs, because while businesses can reduce the number of workers and their paid working hours, they will always need a minimum workforce to operate. dynamic. Overtime payments are often referred to as variable costs, because the overtime a business pays its workers will often increase as production increases and declines as production declines. When wages are paid with overtime pay, the recognition wage is both fixed and variable and is therefore considered variable selling expenses.
Cost management and cost-cutting solutions
Are you applying a management model that only tracks business expenses and income without looking into details? If so, now is the time to change that. As your business grows, understanding things like operating costs will become more and more important.
Operating expenses allow you to have an insight into how your expenses affect your bottom line, helping you to improve your financial health. Once you understand your costs, you can use the 7 methods we've provided to start cutting costs and increasing profits. In addition, you can also refer to salary service to have the most detailed view of salary cost management in the enterprise.
Optimizing business profits is the top priority for every business, to do this, either to increase sales and profitability, or to cut operating costs of the business.
