The structure and types of company costs. The cost structure of the enterprise. Direct and indirect costs

22.09.2020

The concepts of "costs", "output", "company activities" are interpreted in modern economic science quite widely. Under costs everything that the manufacturer (firm) purchases for use in order to achieve the desired result is understood. Release can be any good (product or service) manufactured by the firm for sale. Company activity can refer to both manufacturing and commercial activity, for example, transportation, storage and even the purchase of products with a view to their subsequent resale.

Each manufacturer seeks to increase profits, to greater profitability, or profitability, of their production. Profit is "sandwiched" between two variables: the level of production costs and the level of prices. The higher prices and lower costs, the higher the profitability of production, the greater the profit from it. This means, as Hayek writes, to produce the “right” (desirable) things in the “right” (most efficient) ways.

Therefore, any firm, before starting production, must clearly understand what profit it can count on. To do this, she will study the demand and determine at what price the product will be sold, and compare the expected income with the costs to be incurred.

There are two main ways to increase business profitability:

Capital investment in the most profitable areas of the economy;

All-round reduction of production costs, i.e. cost.

Production costs are a combination of material and labor costs for the production of products. They act as an economic category, which reflects, firstly, the relations that arise between subjects within the enterprise regarding the use of living and materialized labor; secondly, these are relations that arise outside the enterprise between enterprises that supply materials, fuel, etc., enterprises that use these products as raw materials for their production. Costs always take a quantitative expression and are considered through a system of natural and cost indicators.

The costs of the enterprise must always be the object of constant control, or in this process it is necessary to use the requirements of economic laws.

So law of value requires that the value of commodities be based not on the individual but on the social costs of production.

Law rising labor productivity requires that a constant increase in productivity be ensured, otherwise the competitiveness of products is unthinkable.

Firm cost structure . Cost Structure defines them internal organization and building. As the main structural elements of costs, it is customary to single out general or total costs; average or unit, fixed and variable, marginal and sunk costs.

Total costs of the firm equal to the sum of the costs of production and marketing of products of a certain type.

Average or unit costs determine the cost per unit of output.

marginal cost are associated with the production of another unit of output.

sunk costs- one-time costs that cannot be returned back, since they are not taken into account in the price of the product.

Explicit (external) and opportunity (imputed) costs. Explicit costs include all the costs of the firm to pay for the factors of production used, or all the explicit costs of the firm ultimately come down to the reimbursement of the used factors of production. This includes payment for labor in the form of wages, land - in the form of rent, capital - in the form of expenses for fixed and circulating assets, as well as payment for the entrepreneurial abilities of the organizers of production and marketing. The sum of all explicit costs acts as the cost of production, and the difference between the market price and the cost - as profit. Explicit costs (also called external costs) are cash payments for resources received from outside. It is these costs that are taken into account by accounting, so they are often called accounting.

However, not all production resources are actually paid. Some of them the company can use as if "free". For example, the owner of the land does not pay rent, however, cultivating the land on his own, thereby refusing to lease it and additional income arising in connection with this. An entrepreneur who has invested his money in production cannot put it in a bank and receive bank interest on loans.

Therefore, the sum of production costs, if only explicit costs are included in them, may be underestimated, and the profit correspondingly overestimated. For a more accurate picture, so that the firm's decision to start or develop production is justified, costs should include not only explicit, but also implicit (imputed, alternative, internal) costs. Implicit (opportunity) costs are called (opportunity cost) use of resources owned by the firm.

If the firm refused to use its own factors of production in alternative options, then its implicit costs are estimated as the sum of the maximum forgone revenues from factors of production in the best of the rejected options. For example, if the owner of the company is also its manager, uses its own capital and the premises belonging to it, then the implicit costs of the company include:

Lost wages , which he could receive in another firm as an employee;

missed rental income which he could receive

Renting out your own space;

missed interest income on the equity he might have by putting money in the bank;

missed entrepreneurial income, i.e., the profit that he could receive in any industry by organizing a firm there. Normal profit is the minimum wage required to keep an entrepreneur in the industry. It is an element of implicit costs.

For the owner, all costs - explicit and implicit - are alternative because there are alternative uses for the funds he has invested in the firm. economic costs(economic cost) represent payments to all owners economic resources sufficient to divert those resources away from alternative use cases.

Economic Costs = Accounting Costs + Implicit Costs

Focusing on economic costs, the owner decides on the appropriateness of the company's activities in a particular industry. In the future, under the total costs of the TS (total cost) we will understand exclusively economic costs.

Taking into account not only explicit, but also imputed costs allows you to more accurately determine the profit of the company. Economic profit is defined as the difference between gross income and all (explicit and opportunity) costs.

Accounting (financial) profit is the difference between the gross income (revenue) of the firm and its explicit costs.

In the economic practice of Russia, the cost category is used to determine production costs. The cost price reflects in cash the current costs of production and sales of products, includes the cost of consumed means of production, funds for wages, indirect costs of the enterprise and sales costs. The cost does not include: one-time costs, costs not related to the production of products, fines, penalties, expenses from natural disasters, etc. There are production, full, commercial costs.

To assess the level of efficiency of the enterprise, the profitability indicator is calculated, characterizing the profitability or unprofitability of the enterprise for a certain period of time.

Direct and indirect (overhead) costs. direct costs- These are costs that can be fully attributed to the product or service. These include: the cost of raw materials and materials used in the production and sale of goods and services; wages of workers (piecework) directly involved in the production of goods; other direct costs (all costs that are somehow directly related to the product).

Indirect (overhead) costs- these are costs that are not directly related to a particular product, but relate to the company as a whole. They include: the cost of maintaining the administrative apparatus; rent; depreciation; interest on a loan, etc.

Firm An organization that owns one or more businesses and uses resources to produce a good or service for profit.

Costs- the company's costs associated with the production and sale of products. Variants of classification of production costs are diverse. Let's start by distinguishing between explicit And implicit costs

Explicit (external) costs are cash payments for resources received from outside (deliveries of materials, repair work etc.). External (explicit) costs are the company's opportunity costs for the purchase of raw materials, equipment, transport, energy "from the outside", that is, from suppliers that are not part of the enterprise, which the company chooses from many others. These costs are reflected in the financial statements.

Implicit (internal) costs are the costs associated with the use by the firm of its own (internal) resources. Unlike explicit costs, these costs are not paid. They are of a hidden nature, acting as imputed (or alternative) costs of the enterprise's own resources used in production. Opportunity cost is the amount of money that can be obtained with the most profitable of all possible uses of resources. Internal implicit) costs are the opportunity costs for own and independently used resource.

Element of internal economic costs there can be any lost income from the use of one's own resource. Lost wages are taken into account when using their own labor, human resources, lost rent (rent) - when using their own land resources; lost interest - when using your own machines, equipment, etc.; a normal profit is an estimate of one's entrepreneurial talent. Accounting for internal costs is especially important in small businesses.

The sum of explicit and implicit production costs is what economists call economic costs.

Direct costs are those costs that can be fully attributed to a product or service. These include: the cost of raw materials and materials used in the production and sale of goods and services; wages of workers (piecework) directly involved in the production of goods; other direct costs (all costs that are somehow directly related to the product)
Indirect (overhead) costs are costs that are not directly related to a particular product, but relate to the company as a whole. They include: the cost of maintaining the administrative apparatus; rent; depreciation; interest on a loan, etc.
All costs of the enterprise that are associated with the production and marketing of products can be divided into fixed and variable.
Fixed Costs (FC)- these are production costs, the value of which does not change with an increase in the volume of output (payment for company accountants, rental payments, depreciation).

Variable Costs (VC)- represent costs, the value of which varies depending on the volume of production (expenses for materials, raw materials, transport services).

The sum of fixed and variable costs is called total (or total) gross costs.
Total costs (TC) - the total costs of the firm, equal to the sum of its fixed and variable costs, are determined by the formula:

Total costs increase as the volume of production increases. To measure the cost per unit of production, the concept of average costs (AC) (average fixed, average variable costs) is used.

Average (gross) cost (AC) is the total cost of production per unit of output: AC = TC / Q

Medium fixed costs(AFC) is the total fixed cost per unit of output. They are determined by dividing fixed costs (FC) by the corresponding quantity (volume) of output:

AFC = FC / Q Since total fixed costs do not change, then when divided by an increasing volume of production, average fixed costs will fall as more output is produced, because a fixed amount of costs is distributed over more and more units of production. Conversely, if output is reduced, average fixed costs will rise.

Average Variable Cost (AVC) is the total variable cost per unit of output. They are determined by dividing the variable costs by the corresponding amount of output:

AVC = TC / Q Average variable costs first fall, reaching their minimum, then begin to rise. In addition to these costs for market analysis you need to know the marginal cost.

Marginal cost (MC) is the cost associated with producing an additional unit of output. Marginal costs, unlike averages, are calculated as the difference between 2 adjacent gross costs. Marginal cost indicates how much a firm will incur if it produces one more unit of output. And at the same time, what can save if you refuse to release this last unit. For all its importance, marginal cost (MC) in economic analysis the role of average costs is high).

Depending on the time spent on changing the amount of resources used in production, there are short and long-term periods in the activities of the company.

short term- this is a period of time too short for the enterprise to change its production capacity, i.e. the size of the enterprise. In the short run, various types of costs are either fixed or variable.

Long term- this is a period of time long enough for the firm to change the amount of resources used, including the size of the enterprise.

IN long term Since all factors of production are variable and there is no average fixed cost, average variable cost is equal to average total cost.

The effect of a change in the scale of production on the volume of output is called economies of scale. The economies of scale can be permanent, positive or negative.

The positive effect is that with an increase in production volumes, production costs are reduced.

Negative effect - with an increase in production, costs increase.

Constant effect - costs do not change.

The optimal size of the enterprise is when the benefits of scale are fully realized, and the costs are minimal.

Any firm, before starting production, must clearly understand how much profit it can expect. To do this, she will study the demand and determine at what price the product will be sold, and compare the expected income with the costs to be incurred.

Figure 1. Cost structure of firms

Explicit and opportunity (imputed) costs

Consider the costs of the firm in the process of production and marketing of goods and services. First of all, let's pay attention to explicit and opportunity (imputed) costs, since both of them are taken into account by the firm in its activities. Explicit costs include all the firm's costs of paying for the factors of production used. The classical factors of production are labor, land (natural resources) and capital. Modern economists tend to single out entrepreneurial ability as a special factor. One way or another, all the explicit costs of the firm ultimately come down to the reimbursement of the used factors of production. This includes payment for labor in the form of wages, land - in the form of rent, capital - in the form of expenses for fixed and circulating assets, as well as payment for the entrepreneurial abilities of the organizers of production and marketing. The sum of all explicit costs acts as the cost of production, and the difference between the market price and the cost - as profit.

However, the sum of production costs, if only explicit costs are included in them, may be underestimated, and profits will accordingly be overestimated. For a more accurate picture, in order for the firm's decision to start or develop production to be justified, the costs should include not only explicit, but also implicit (imputed, alternative) costs.

Alternative costs are called costs (opportunity cost) of using resources that are the property of the company. These costs are not included in the firm's payments to other organizations or individuals. For example, the owner of the land does not pay rent, however, by cultivating the land on his own, he thereby refuses to rent it out and from the additional income that arises in connection with this. The self-employed worker is not employed by the factory and does not receive wages there. Finally, an entrepreneur who has invested his money in production cannot put it in a bank and receive a loan (bank) interest.

Taking into account not only explicit, but also opportunity costs allows you to more accurately assess the profit of the company. Economic profit is defined as the difference between gross income and all (explicit and opportunity) costs.

Direct and indirect costs

The division of costs into explicit and alternative is one of their possible classifications. There are other types of classification, such as dividing costs into direct and indirect (overhead), fixed and variable.

Direct costs are costs that can be attributed specifically to a particular cost object in an economically viable manner. These include:

* the cost of raw materials and materials used in the production and sale of goods and services;

* wages of workers (piecework) directly involved in the production of goods;

* other direct costs (all costs that are somehow directly related to the product).

Indirect (overhead) costs are costs that are not directly related to a particular product, but relate to the company as a whole. They include:

* the cost of maintaining the administrative apparatus;

* rent;

* depreciation;

* interest on a loan, etc.

Fixed and variable costs.

The criterion for dividing costs into fixed and variable is their dependence on the volume of production.

For the purposes of pricing and managing this process, the most important is the division of costs depending on their dynamics when changing production volumes into fixed and variable.

Fixed (FC) are called costs, the value of which does not depend on the volume of output and remains unchanged in a certain range of production scales. In their economic essence, fixed costs create conditions for the implementation of the target activity of the enterprise, they objectively exist even if the enterprise does not produce products, and change when the conditions of production change (the introduction of additional equipment into operation, the construction of new buildings) or when prices change. Fixed costs include the cost of rent, depreciation of fixed assets, the fixed part of the salary of administrative and managerial personnel with deductions for social needs, the cost of maintaining and maintaining buildings and equipment, etc.

Variables (VC) are costs, the value of which depends on the volume of output. By their economic nature, variables represent the costs of the actual implementation of the target activity for which the enterprise was created: they arise when the enterprise produces products, and the larger the scale of production, the greater their total amount. Variables include the costs of raw materials, materials, components, fuel and electricity, wages with social contributions for the main production workers, distribution costs, etc.

Part of the costs of the enterprise is mixed, that is, it contains elements of both fixed and variable costs. An example of a mixed cost is the cost of telephone bills: subscription fees are constant, while long-distance calls fluctuate. Mixed costs must be divided into fixed and variable by introducing an appropriate accounting system, but in practice they are most often subdivided using various statistical techniques.

The importance of dividing costs into fixed and variable is explained by the fact that in market conditions, due to changes in market conditions, a situation often arises when an enterprise is forced to reduce or expand the volume of production and sales of products. Fluctuations in the scale of production and trade activities significantly affect the level of the average cost of production and, as a result, the amount of profit received. This is due to the fact that the prime cost includes variable and fixed costs, and when the volume of production changes, the amount of fixed costs per unit of production also changes, as a result of which the prime cost index fluctuates, and with the growth of production and sales, the cost of the product decreases due to the decreasing part of the fixed unit costs.

Costs, as well as their identification, evaluation and control, represent the area of business that has been worked out the best, perhaps even too carefully. This area employs the most busy, tool-packed representatives of a range of business professions: accountants, industrial engineers, analysts, operations researchers, and so on. Any Anglo-American economist, an ardent supporter of the "theory of the firm", is primarily interested in costs, their nature and control over them. The same applies to German economists. A huge amount of effort goes into cost control and analysis. There is clearly no shortage of tools, techniques and literature here.

So, for example, the annual race to cut costs in most companies is no less predictable than a runny nose in the spring. And almost as "pleasant". However, after six months, the costs return to their place - and the business rushes into the next round of the fight against them.

One important exception in this case is the "miracle" of new management in a dilapidated company. Under the previous, tough management, this company usually enjoys a leadership, even a monopolistic position. And when management becomes weak, it “drifts” aimlessly for some time until it finds that it is about to fall apart. In this case, costs can be reduced by a third, or even by half - for example, as a result of closing an old plant that has not been profitable for several years. But it also means that the "miracle" of cost reduction is, at best, a brief reprieve that new management can use to drastically reshape the business.

By and large, the best way to control costs is to focus resources on results. After all, costs do not exist on their own. They are always carried for the sake of certain results (in any case, it should be so). Therefore, it is not the absolute level of costs that is important, but the ratio between effort and results. No matter how cheap and cost-effective an effort is, if it does not produce the desired result, then it is no longer just a cost, but a waste of money. And if they have not been able to provide good results, then they were not justified from the very beginning. Thus, in order to obtain a high cost-benefit ratio, and with it effective cost control and low costs, it is necessary to take advantage of opportunities to the maximum. It is this goal that should come first; all other cost-cutting efforts would be rather incremental.

But even a business that systematically works to direct its efforts and resources towards opportunities and results needs cost analysis and control. No company can function without expending some effort in vain, just as no machine on earth can not waste a certain amount of energy on friction. But the effectiveness of cost management in business can be greatly improved, just as this friction in the mechanisms can be reduced.

There are several sine qua non conditions for effective cost control.

1. It is necessary to concentrate efforts in those areas where real costs arise. It takes almost as much effort to reduce the cost of a $50,000 product by 10% as it would to reduce a $5 million product by the same 10%. In other words, costs are also social phenomenon- 90% of the costs come from 10% of the business.

2. Different costs should be treated differently. Costs are very different in their characteristics - as different as products.

3. The only one really effective method reducing costs is to completely stop this or that activity. Reducing certain costs rarely gives tangible results. There is little use in trying to do cheaper what should not be done at all.

However, usually the cost-cutting event begins with the fact that management announces that the company does not intend to abandon any line of business or division. This dooms the business to failure. This approach can only worsen current position business and guarantees that in a few months things that are not important for the business will return and the costs of them will be the same.

4. Effective cost control requires that the entire business be considered as a whole, as well as all of its performance areas.

Otherwise, costs will be reduced in one place simply by being pushed elsewhere. This may all look like a big win in terms of cost reduction, but after a few months, when the final results are in, it turns out that the costs were higher than ever before.

Of course, in manufacturing, there are cost savings that come from shifting the burden of adjustments to shipping departments and warehouses. In it, there is a reduction in the cost of inventory, as a result of which uncontrolled fluctuations in costs are transferred to the production process. Usually there is also a very serious cost reduction due to price reductions in the purchase of certain materials, which ultimately leads to longer, slower and more expensive equipment. Any manager knows that such examples can be given endlessly.

5. "Cost" is an economic term. Therefore, the cost system to be analyzed is the entire economic activities that provide a certain economic value to the business.

Cost should be defined as something that a consumer pays to get a particular good or service and take full advantage of its utility. However, they are usually determined not from an economic, but from a legal point of view, i.e. as all expenses arising in a particular - and absolutely arbitrary - economic unit, in a particular business. This approach does not take into account the huge set of true costs. Two-thirds of the costs for each product are outside the business. The manufacturer, for example, accounts for at best one-fourth of the consumer's costs, with the remainder going to the raw materials he purchases, the manufacturer's or converter's costs, and of course the distribution costs that typically accrue in legally independent wholesalers and distributors. retailer. A retailer, such as a department store, is also responsible for only a small fraction of total costs. The main costs are for the goods he buys to sell, and so on. For consumers, however, total costs are important, as they determine whether they will buy a product or not. They are not at all interested in how these common costs will be distributed in the economic chain among different legally independent businesses, from raw materials to finished product. They are interested in what they have to pay for what they really get.

Cost control that is limited to the costs incurred by a business unit in the economic chain will by no means be effective. At a minimum, it requires the analyst to know and understand the total, aggregate costs.

Indeed, the definition of costs goes far beyond what the consumer purchases. Nobody buys a thing. Everyone buys the satisfaction and utility that can be derived from it. Therefore, the true economic cost must include everything that the consumer has spent to get the full value of the purchase - in the process of maintenance, repair, etc.

It by no means follows from this that a product can be sold more expensive just because the cost of its maintenance has become lower. It may well be that the situation of the consumer himself forces him to "define" the price as an initial cost and not pay attention to the costs associated with maintaining the product in working order. In the US and England, for example, municipalities are usually strictly limited in their actions as creditors, but they are given fairly broad rights in the field of taxation. Thus, they can afford higher tax-paid operating expenses only on the condition that capital expenditures, which are normally financed by borrowing, remain low. As a result, municipalities in these countries will never buy aluminum street light poles because, although they cost less than steel over a twenty-year life, they will cost more as an initial purchase.

Thus, cost analysis is, in fact, neither reliable nor meaningful until its conclusions are put through the lens of marketing analysis that allows you to look at the business from the outside. Cost analysis itself is only a limited, narrow view.

In some of the most successful companies, the work done on external, third-party costs has become the main key to success.

Two giants are examples. retail that have become models of sales success in America and the UK are Sears, Roebuck and Mark & Spencer, respectively. Both were hugely successful due to their ability to find manufacturers, develop and improve their suppliers' production processes, and accurately estimate costs. finished products manufacturers. Both of these companies have assumed responsibility for the costs of manufacturers, their products and processes, which goes far beyond their legal liability.
And the success of General Motors, too, is largely due to its activities in the field of reducing the costs of an independent dealer.

Thus, in order to be able to effectively control costs, a business needs cost analysis, with which you can do the following.

Reveal cost centers, i.e. areas in which the company incurs the most significant costs and in which their reduction can bring really significant results.
Find the most important cost points in each of the major cost centers.
Treat the business as one cost stream.
Define costs as what the consumer pays.
Classify costs according to their basic characteristics and therefore give them diagnosis.

Typical cost centers

Where are the cost centers in business and its economic process? Where is really about um control them? In other words, where are relatively small improvements in cost structure likely to produce the most significant results in terms of total business costs? And in what areas, even major changes will not lead to any significant effect in terms of the company's total costs?

In table. Figure 5.1 provides an analysis for Universal Products cost centers. It is clear that these are only general, approximate figures, which are given only to show where to look next.

Table 5.1. Universal products company: total costs and cost structure*


	Physical movements of materials and goods (a) from the material supplier to the factory; from the warehouse to machine tools and conveyors (6%); (b) from machine tools and a conveyor in the form of finished products through the processes of packaging, delivery and warehousing to a wholesaler (6%); (c) through distributors (wholesale and retail) (5%)
	Sales and promotion(manufacturer, wholesaler and retailer)
	Cash costs in the manufacturer's business, including working capital, interest, depreciation and equipment maintenance(manufacturer only)
	Distributor's cash costs(rough estimate)
	Manufacturing - converting materials into products sold on the market
	Purchased materials and other supplies
	Management, administration, accounting(manufacturer, wholesaler and retailer)
	Investment in tomorrow - in research, market development, management development, etc.
	Profits (before taxes) of the manufacturer, wholesaler and retailer, excluding profits of suppliers of materials that are not known

* A real, actual analysis (here it is given in a highly simplified form), of course, would not display absolute numbers, but ranges, for example, in the first line, most likely, not 17% would be indicated, but, say, 13-19% .

Money spendings(both in the manufacturer's business and in the distribution channel) and physical movements of materials and goods totaling 36%. And this is quite typical for business. However, these two areas are usually overlooked as cost centers.

A financial analyst might object that the cash costs are actually much higher than shown here. They usually include a large share of what appears as profits, which is usually used to keep the business in business. This position has one advantage: by adopting it, you make cash costs the largest of all cost centers.

Money in business is always the main cost center. It is also one of the cost areas where efforts are most likely to yield meaningful results. As a rule, it is much easier to increase the rate of turnover of funds than not sufficiently high net income. However, only in the last few years American management began to take money management seriously in business. This job has only recently come to be seen as an important function of management personnel, a job for which a member of senior management should be responsible and to which one should devote a whole day.

Moreover, companies often do not consider the financial structure that best suits their needs. economic conditions and allows you to use the most expensive "raw material" - money - with maximum benefit. Companies, at least American ones, usually use their own cash to finance bank loans, although everyone understands that you will not receive a return on equity on such a loan.

Until a few years ago, a large American food processing company, in particular the preservation of seasonal products such as tomatoes, peas and corn, used only its own capital. But vegetables must be preserved when they are ripe, and then stored in canned warehouses for the rest of the year. In other words, the equity capital was invested by the company in goods and lay without movement and use for many months, and this at a time when the company could easily take a bank loan for the most favorable conditions. As a result, the further this company grew, the less profitable it became, to the point that it almost ruined itself, despite a very successful business.

Similarly, it is not uncommon to find companies that use permanent debt to meet purely seasonal needs, such as long-term bills to replenish fluctuating inventories. As a result, it turns out that they pay interest for the whole year on money that they use for two or three months. Often there are firms that are "poor in real estate" and invest huge amounts equity in real estate, which they either should not have at all, or which they must finance with the involvement of insurance companies' money or using traditional mortgages.

In general, it can be said that any dogmatic financial policy is most likely incorrect. It would be equally wrong to say "We don't believe in debt" and "We borrow every penny if possible." The right approach to money management is to think about it in terms of business economics and allocate finances accordingly. Very few things cost a company more than doing the wrong thing. financial structure. However, there are also very few aspects that are just as well hidden under the traditional cost approach and go beyond the scope of traditional cost reduction activities.

But, in addition, the monetary costs of business are often inflated by economically incorrect conventions, especially those relating to tax laws and regulations. For example, the tax difference between capital investment and operating expenses leads to hidden costs. The difference between them is more legal than economic character. From an economic point of view, capital investments can be viewed as the present value of future earnings expectations, and maintenance and depreciation costs are nothing more than the incremental contributions that pay off these capital investments. Therefore, the cost center always remains the total cost of capital, regardless of whether this is displayed as operating costs, i.e. maintenance, on the income statement or as an investment on the balance sheet. In other words, regardless of whether it is shown as an expense or as an asset, the only correct criterion in this case will be that which requires less cash (including taxes). Looking at the numbers in Table. 5.1, we cannot draw such a conclusion.
However, just looking at them, you immediately begin to suspect that the company is actively financing its distributors. Although, whether this is true and how far it achieves its goal remains unclear.

Sales has always been one of the largest business cost centers. One of the reasons for this is that the costs of it are distributed across all companies, throughout the entire economic process as a whole. However, a significant part of these costs are in this process somewhere between the two companies, and both do not pay any attention to them. Another reason is that distribution costs within a single business are usually hidden in many different places, and not clearly visible, as befits the costs of one of the main areas. economic activity. The costs of moving goods and their warehousing are also related to the sales area, but at the same time they can be displayed in the “miscellaneous” column under a variety of names.

So, for example, in a manufacturing enterprise, there are costs that the business incurs between the final stage of production, i.e. the stage at which the product leaves the machine or conveyor and its delivery to the consumer. These costs include labeling, packaging, storage, and handling costs. They are usually treated as production overheads; no one is specifically responsible for this activity. However, inventory outside the manufacturing enterprise is usually classified as working capital, and the cost of inventory as a cash cost.

Physical distribution costs are much more responsive to cost reduction and control efforts than manufacturing costs, if only because there is usually much more effort in this area.

For example, a significant cost point for many companies (and also in distribution systems such as those used by the US Air Force) is warehousing. In some industries, the cost of it reaches 8% or more of the total consumer spending. In any warehouse, except for the most mechanized modern enterprises, the main cost is wages. But at the same time, in the warehouses of many companies that are proud of the highest level of automation and mechanization manufacturing enterprises, labor costs are often twice as high as they should be. They still use the traditional brigade system, in which three or four people work on a task that, in fact, one person can easily complete (for example, unload a truck or wagon). There is room in the forklift for only one operator, and the rest just stand and watch him work. With such a system, from 40 to 60% of the working time is usually wasted.

And in the workshops, such costs have long been noticed and successfully got rid of them.

Raw material in the manufacturing business, too, is almost always the cost center of the first magnitude. They should be treated the way an efficient large retailer finds, selects and purchases goods to sell to customers. It is not enough to simply buy some good quality material cheaply. The effect of raw materials on costs is such that their selection must become an integral part of product design. In terms of material or component, the manufacturer is the same distribution channel. The material must be suitable for his product, but the product must also be designed to match the materials available to the manufacturer. And both of them must be combined together so that from the available raw materials - the cheapest and highest quality - as a result of going through the entire process of manufacture and distribution, the best possible product is obtained.

This is what they mean when they talk about materials management, not purchasing. There are many good techniques for this today; for example, organizing a cost-effective activity in which a specialist looks at each product and asks: “What is the easiest and cheapest way to do this particular job?” Some large buyers, such as automotive companies, have become extremely experienced and skilled material managers over time, integrating the process of product development and raw material procurement as much as possible. But most manufacturers still have to learn what the big retailers learned thirty or even forty years ago: buying is just as important as selling; even the most efficient sales cannot compensate for insufficiently high performance in the field of procurement.

Conversely, production costs - i.e. the cost of performing physical actions that change the composition, shape, configuration or appearance physical substance are not significant center costs.

Production is one of the areas in which systematic and continuous work to control costs, i.e. The work of an industrial engineer has been going on for a long time. In most industries, true manufacturing costs have become such a small part of total costs that it will take a true revolution in manufacturing technology to bring down costs seriously.

Such a breakthrough can occur as a result of a major change in everything manufacturing process, for example, its automation, i.e. a significantly higher level of mechanization in the execution of work, more efficient management of materials and improvements in the process of collecting information and control.
But the opportunity here may also lie in the opposite direction - towards less integration of the process and more flexibility. In many manufacturing industries, such as aluminum rolling or pulp and paper, real breakthroughs have been achieved by decoupling the manufacturing process from the finishing process. For example, the aluminum rolling mill is physically separated from the cutting, painting and forming process. And in the production of paper, a revolutionary breakthrough was the result of the separation of the production of paper pulp from the process of making paper, cutting it, etc. In both cases, inventories that were normally used in the form of finished products are now stored as semi-finished products between production and finishing, leading to a significant reduction in inventory requirements while significantly improving the company's ability to meet the diverse needs of its customers. clients.
Sometimes the most powerful breakthrough is to shut down a business even though it is “running like new.” The plant may be the “wrong” size, it may be located in the wrong place, and perhaps in time it will turn out to be completely unnecessary.

The most important contribution to production in terms of costs may be the organization of the process in accordance with its economic characteristics rather than with tradition. A paper mill is usually organized to make optimal use of paper stock. But this mass is only one of the basic materials used in this production. For example, the temperature is very important, as well as the chemical components that make the paper coated or translucent, apply a coating that makes it easier to print on it, etc. Organizing the papermaking process around the most efficient use of heat and chemicals, rather than the process of converting paper pulp to paper at the lowest cost and fastest, can dramatically change the economics of a paper mill. And such changes in the ratio of the balance of raw materials and materials around which production is organized are possible in other industries and processes.

Such breakthroughs in technology should be a natural consequence of cost reduction activities, and this area usually employs the most skilled industrial engineers. However, at the same time, many managers still believe that they have excellent control over costs, day after day, observing the fluctuations in production costs in different parts of the production process.

Cost points

Cost points are those few activities at the cost center that account for the lion's share of costs. In this case, this is also just an assumption. Most cost points are, without a doubt, those activities that account for transactions, on which, in turn, the analysis of performance areas is based (see Chapters 2 and 3).

In table. 5.2 presents such an analysis for the most important cost centers.

Table 5.2. Universal products company: cost points

	Major cost center	Cost points	Cost percentage of this cost center	Consumer dollar percentage
	Physical movement of materials and goods	1. Transportation within the enterprise and between plants
		2. Transportation to factories from other enterprises
		3. Warehouse management
		4. Packing
	Sales (manufacturer, wholesaler and retailer)	5. Sales staff
	Sales (manufacturer, wholesaler and retailer)	6. Sales promotion
	Money spendings	7. Inventories of finished goods, especially in warehouses
		8. Accounts receivable
		9. Interest
	Cash costs (distributors)	10. Inventory
		11. Material A
		12. Material B
		13. Packing materials
	Administrative expenses	14. Other expenses
	Administrative expenses	15. Credit and collection
Total costs

* As we can see, fifteen activities—out of several hundred—account for nearly 50 cents of every consumer dollar.

Some of these results were, of course, expected by the company's management. For example, the following.

But b about Most of the results came as a real surprise to them. The following indicators were especially frustrating, since they turned out to be significantly more than expected.

On the other hand, the costs of promotion (Item 6) were expected to be much higher. In effect, the company's dealers left these costs to the manufacturer, instead of joining forces with those of the manufacturer. And although the amount of receivables was known, their relationship to the volume of inventories clearly confirmed the assumption that in fact the company finances not only the sale of its products, but also the distributor itself, without receiving any payment for this. And the high costs of ordering and credit (articles 14 and 15) also indicated that something was clearly wrong with the system for marketing the company's products.

But the cost of packaging materials (Article 13) plunged into a real shock. This was an important cost element that the company had not noticed at all until now. While other materials were procured by the purchasing agent, packaging materials remained the responsibility of the designers in the marketing department. And they, of course, did not pay any attention either to the cost of packaging, or to the fact that there is packaging designed for cheap and easy transportation of goods, their storage, loading, etc.

In some important areas, the analysis showed the need for urgent action. The company has reduced overall transportation costs by almost a third, and transportation between factories has been almost completely eliminated.
The cost of keeping goods in warehouses, which accounted for almost 10% of total costs, was significantly reduced. It was found that by using fewer warehouses equipped in accordance with modern technologies, serve customers faster and cheaper than using a large number of technically outdated warehouses. Quantity finished products distributors also had a cut, as new warehouses could serve consumers around the clock.
Since the costs of processing invoices, credit and collection have greatly decreased, accounts receivable have sharply decreased. At the same time, the effectiveness of sales promotion efforts has increased significantly. After performing a performance area analysis, the company realized that out of a dealer network of 10,000 individual retailers, the top 2,000 accounted for about 80% of sales, while the remaining 8,000 retailers accounted for 80% of costs. Therefore, in this case, effective cost control meant taking decisive action against the three thousand smallest sellers, each of whom sold a maximum of 3 thousand dollars of goods per year, and in aggregate they brought no more than 5-6% of total sales. companies. Moreover, a post-analysis study of the situation in all areas of the company and focused on the main cost points, such as transportation, inventory, receivables and administrative costs, showed that small sellers accounted for almost 40% of the costs in these areas. They had concentrated the bulk of inventory, ie. it was these dealers that the company had to finance. They also accounted for a disproportionate share of ordering and shipping costs because they ordered small quantities of goods. And it is clear that they accounted for a large share of the cost of credit and collection.
As a result, small dealers were transferred to the system of payment in cash at checkout; moreover, orders were only accepted from them by mail, and a minimum order quantity was set. Orders were delivered subject to full payment by the dealer for the transportation of cargo from the warehouse closest to his enterprise. The sales staff stopped interacting with them directly. For three years, all this reduced the total cost of maintaining shipped products by 9%. Accounts receivable, for example, have all but disappeared, as have the costs of credit and collection. And the purchases of small dealers at the same time decreased by only a third, or 2% of the total sales. In fact, overall sales began to rise as salespeople, who no longer had to spend a third of their time dealing with unproductive dealers, focused on large retailers selling large volumes of merchandise.

But it would be wrong to treat each cost point as a separate problem. An analysis of individual points will certainly show that the costs form a system, all parameters of which are interdependent. The required effort and associated costs may be required in more than one place, albeit with very different results.

For example, at Universal Products, low total cost performance was achieved by maintaining a high level of inventory. This could improve the efficiency of the production process, for example, by allowing production to be planned a year in advance, thus avoiding dependence on fluctuations in demand. But at the same time, the costs of maintaining more inventory can be so much higher than the costs caused by the irregularity of production that this will only lead to additional losses.

Only a study that considers the entire physical flow of materials and their storage as a single system (and it is quite accessible to an operations researcher or systems engineer) can confirm whether low production costs compensate high levels inventories, and if so, to what extent.

Thus, each cost point should be considered as an element of the overall cost stream. Each action in relation to a particular cost point should be tested taking into account how it will affect costs in other areas. There is no such thing as "cheap" or "efficient" production. There is only production that provides the consumer with a cheap or useful product or service. It is necessary to understand the relationship of all the costs of the company. Optimization of individual areas of the process should be avoided, which reduces costs in one area at the expense of increasing costs and reducing efficiency in another. Here it is desirable to compromise, sometimes forgoing promising cost advantages in one location (and sometimes even agreeing to higher costs), in order to obtain more significant cost advantages in another area, if this allows you to significantly reduce the overall expenses .

Categories of costs

The main cost points can be divided into several categories.

1. Productive costs- is the cost of efforts aimed at creating the value that the buyer wants to have and for which he is willing to pay. These include the true production costs, as well as the costs of bringing the product to market, wages, financial transactions, and distribution. Packaging costs should be included in this category if they provide the product with distinctive characteristics in the market.

2. Ancillary costs by themselves do not create value, but it is impossible to avoid them. Typical costs of this type include transportation costs. This category also includes the costs of placing orders, carrying out inspections and personnel work, for accounting, etc. In accordance with the "ideal theory" of business, these activities can be ignored or considered as overhead costs. However, in the real world, they require as much effort as it takes to overcome friction in the mechanism.

3. control costs- this is the cost of activities aimed not at ensuring the performance of any work, but at preventing negative results. Every business needs an early warning system for problems in case, for example, a product is not selling as well as expected, or if the company's technology no longer provides it with competitive advantage on the market. This category also includes the costs of supervising the activities of suppliers and distributors.

4. Overhead costs is the cost of efforts that cannot produce results.

The largest and most expensive cost of this type is the cost of "inaction", such as equipment downtime. Everyone in the shop is waiting for the repairman to come or for the production of a new batch of products to begin. Everyone is waiting for the furnaces, after they have melted one type of alloy, to cool enough to be cleaned and ready for the smelting of another alloy. "Sleep" is when an oil tanker sails empty from an oil refinery on the US West Coast into the Arabian Sea, or a ship specially equipped to carry bananas returns empty from Rotterdam to Ecuador. It's a 150-seat jet that hangs in a hangar or flies with fifteen passengers on board; it is a cargo ship that spends five days in a port of loading/unloading.

It should be recognized that all of the above categories of costs cannot be considered economic concepts. But such classifications, which show the difference between the main cost points, are very important, because each type of cost requires its own analysis and approach to controlling them.

So, analyzing productive costs, you should think about what will be the most effective, what will give the best results with the least effort and cost?

This is why it is appropriate here to use the concept of incremental benefit and advantage costs, described in Chapter 4. Productive costs must rise to that limit, but go beyond it, until the unit of incremental acquisition for each additional unit of investment begins to decline sharply.

This means that productive costs cannot be controlled as costs. They are controlled by focusing resources on opportunities. They require more control over results than over costs.

Therefore, the criterion for their evaluation is always the productivity of the resources used. Productive costs should be valued in terms of the results achieved with the three key resources of any company: people, time, and money. Cost control adds to the earlier analysis of performance areas and resources distributed between these areas, its own units of measurement of productivity, in particular: sales and profit per dollar of total wages paid (productivity unit of labor costs); sales volume and profit per man and machine hour (time productivity); sales and profit per dollar of total cash costs (capital productivity unit) . Concentrating resources on opportunities is the only effective way to control productive costs.

If speak about ancillary costs, then first of all it is necessary to prove that the company needs them at all. We must ask the question: "How much will we lose if we do nothing?" And if the answer is: “Less than the minimum ancillary costs,” then it is better to risk possible losses and save on costs of this type. No one spends more than 99 cents to get a dollar; and where the benefit is only possible - and even likely - to spend 99 cents on it will be too big a cost.

A prime example of what not to do is the story above about how Universal Products managed its distribution costs. The company cut them drastically by moving 3,000 small retailers to a cash-on-delivery system for mail-order orders. But still these costs remained greater than any possible profit from them. Even under this system, small retailers are expensive; the total cost to the company of maintaining these distribution channels was clearly higher than the possible profits from their activities. At the same time, the complete elimination of support for all small sellers would probably not affect the profits from the sale of the company at all - an increase in orders from large retailers, in all likelihood, could quickly compensate the company for the loss of small sellers.

If ancillary costs cannot be completely eliminated, they should be kept to a minimum. The question must be asked: What are minimum costs and what effort will they require?

With regard to this type of cost, the use of the principle of "minimum effort" always entails a reorganization of activities.

In all likelihood, the largest ancillary costs are the costs of loading/unloading and moving materials and products in the production process. Even in a business where there is no physical movement of goods, such as the financial services industry, the costs associated with processing, storing, posting documents, policies, cheques, invoices, etc. represent a major cost center. Yet very few firms have even the most general idea of the costs of moving products.
In order to control transportation costs, the entire flow of materials must be considered both as a physical and an economic system in which the maximum amount of work must be carried out with the greatest economy. All work, starting from the moment when the product leaves the assembly line, goes through the processes of packaging, packaging, labeling, shipment, storage, etc., up to the final destination of its journey, i.e. to the consumer, should be considered as a single integrated process.
It should be carried out at the lowest cost and bring the greatest economic benefit to all its participants: the manufacturer, wholesaler and retailer and, finally, the consumer.

It must be admitted that this cannot be done in one day. However, today we do have the tools to do this work, first of all, the methods of scientific management, and where they are applied, excellent results have been achieved.

The best thing you can do with control costs is to control nothing at all. The question to be asked is: “Can we lose more than what control will cost us in this case?” If the answer is no, then it is better to refuse control. If it is necessary, then the same principle of “minimum effort” should be applied. In this case, this, in particular, means preventing the influence of negative factors on the activities of the firm as a whole through selective observation, and not control over each operation.

In many companies, this is how the control over the quantitative and qualitative levels of inventory is carried out. Acceptable limits are set for indicators such as customer perception of the product, fulfillment of delivery obligations, deadlines production program, and it turns out what their minimum values should be, going beyond which jeopardizes the achievement of the desired results. This allows you to limit control, which, of course, significantly reduces the amount of effort and cost of the company in this area.

Perhaps the most elegant way to manage control overhead is to use statistical method small samples. It is necessary to find a type of activity that is necessary in any conditions, but at the same time controls and checks many areas of the company.

For example, one large shipping company uses to control the quality of all operations in the implementation of cargo and passenger traffic- at berths, in terminals, when servicing passengers, etc. - handling complaints.
Complaints and claims arise when the cargo is damaged, delivered late or to the wrong address, when there is some damage to the passengers. If a firm wants to satisfy claims at the lowest cost, it needs to keep statistical records of them. And then 95% of complaints do not require any consideration.
But in this shipping company, complaints were dealt with in relation to all activities, on a case-by-case basis. The theory she used (by the way, later fully confirmed by experience) said that shortcomings in working with cargo and passengers quickly manifest themselves in the form of complaints. And the analysis of each complaint provides 100% control over the shortcomings at all stages of work. However, even all claims and complaints in the aggregate represent an insufficiently large sample for statistical control over the quality of work of the entire enterprise.

This example also shows that it is true effective management over the costs of control requires tense, permanent job. The usual method won't work here. On the contrary, it may even lead to an increase in these costs. Yet the first thing managers tend to do when implementing a cost-cutting program is to increase the level of control and oversight.

The high cost of inaction

Overhead costs rarely require careful analysis. It is usually immediately clear that certain costs cannot bring results, but whether we can change something here is another question.

But costs of this type are often difficult to identify. The cost of doing nothing tends to hide behind other numbers.

This, of course, does not apply to such obvious cases of inaction as, for example, an empty tanker voyage or an empty jet aircraft. But for years, shipping companies did not realize that their main cost was the cost of downtime in the port rather than the actual transportation of goods. The time spent in the port was taken into account simply as "overhead costs". As a result, during the development of the design of the vessel and in the process of managing it, the emphasis was on high-speed performance and low operating costs. But the decline in already low operating costs has led to an even greater increase in the cost of staying in port, slowing down the loading and unloading process and increasing downtime.
Attempts to address the cost of inactivity, such as setting a minimum voyage profitability for a given ship model (i.e. determining the number of hours on a voyage required for optimal operation of a ship's engine), are inappropriate. These figures still reflect action rather than inaction. They rarely include the high costs that result from downtime during a changeover during production, such as cooling and cleaning smelters when switching to another metal, when both the expensive rolling mill and its maintenance workers are idle. The difference in the degree of use of one or another equipment is rarely taken into account.
So, in the process of smelting two different aluminum alloys, rolled products are used, but equipment for finishing the product is practically not used. As a result, the reported smelting costs may be up to 30% lower than the actual costs, and an appropriate price will be charged for this product. Indeed, finishing equipment should be idle while the rental process is in progress. But although it is idle, there are still costs to operate it, and the finishing shop is the area where the most people are concentrated, and therefore the highest costs are formed there. However, this is not reflected in the usual figures.

Overhead costs are high in any business. In the end, a person is generally not a very effective “mechanism”. Therefore, it is always necessary to make additional efforts to identify these costs.

One indication that the cost of inaction is high is provided by the accounting data itself. If "shared production costs" or equivalent exceeds one-third of total production costs, I suspect there is a large hidden overhead. Another warning sign is the strong discrepancy between the costs attributed to a product's accounting share and the share of the total cost burden calculated from transactions attributed to that product.

But The best way to identify costs of this type is to answer the question: "Where are we wasting time, money and labor for zero results?"

There is only one reasonable approach to unproductive costs: they must be disposed of.

Sometimes, as in the example above of the 3,000 small retailers that the company managed to get rid of costs, thus eliminating the high costs of inactivity (in this case, no sales), this does not require much effort.

But it is very difficult to get rid of many types of unprofitable jobs. Sometimes this requires a reorganization of the entire business, but more often it requires major changes in production methods, equipment, and organizational policies.

However, it should be recognized that such efforts are generally excluded from the conventional approach to cost control and cost reduction. They require large and lengthy activities. Indeed, b about Most of the most costly costs are usually found in the "constraints" of the business - and as such they are a serious potential that can and should be turned into real opportunities.

Most cost-cutting programs don't even address overhead costs, although they are a major cost center in any business.

Cost management requires the same systematic approach as described earlier, which is used to manage business performance areas and resources. The conclusion drawn from the cost stream analysis described above (what problems to solve, in which direction to go, what goals to set) should be part of a general understanding of the business and part of a broad program to ensure its maximum efficiency.

1 For elaboration, both visual and mathematical, there are two well-known tools - the RERT and PERT / COST systems (Project Evaluation and Review Technique - a method of planning and estimating time using a network diagram). They allow you to identify the relationships between the components of very complex systems, such as, for example, a new ballistic missile or spacecraft.

2 These figures should be calculated on the basis of value-added figures and not on total sales figures. Where raw materials are an important element, you can add an indicator of the productivity of their use, which displays the volume of sales and profits per unit of materials used.

Explicit and opportunity (imputed) costs

Consider the costs of the firm in the process of production and marketing of goods and services. First of all, let's pay attention to the explicit and opportunity (imputed) costs, since both of them are taken into account by the firm in its activities. Explicit costs include all the firm's costs of paying for the factors of production used. The classical factors of production are labor, land (natural resources) and capital. Modern economists tend to single out entrepreneurial ability as a special factor. One way or another, all the explicit costs of the firm ultimately come down to the reimbursement of the used factors of production. This includes payment for labor in the form of wages, land - in the form of rent, capital - in the form of expenses for fixed and working capital, as well as payment for the entrepreneurial abilities of the organizers of production and marketing. The sum of all explicit costs acts as the cost of production, and the difference between the market price and the cost - as profit.

Example 10.1. You have decided to renovate your apartment on your own. Your costs will be the cost of wallpaper, paint, glue, etc. However, while renovating an apartment for several days, you refuse another job where you could receive a salary (for example, you took a vacation at your own expense). Your cost structure will look like this:

Obviously, if the repair office for the same work (without the cost of materials) requires less than 3,000 rubles, then you will prefer to apply there, and if more than this amount, you will repair the apartment yourself.

By distinguishing between explicit and opportunity costs, one can define what is meant by profit in accounting. accounting profit ( financial profit) is the difference between the gross income (revenue) of the firm and its explicit costs. In practice, as a rule, the head is faced with this type of profit.

Direct and indirect costs

Direct costs are those costs that can be fully attributed to the product or service. These include:

The cost of raw materials and materials used in the production and sale of goods and services;

Wages of workers (piecework) directly involved in the production of goods;

Other direct costs (all costs that are somehow directly related to the product).

Indirect (overhead) costs are costs that are not directly related to a particular product, but relate to the company as a whole. They include:

Expenses for the maintenance of the administrative apparatus;

rent;

depreciation;

Interest on a loan, etc.

The criterion for dividing costs into fixed and variable is their dependence on the volume of production.

Fixed, variable and gross costs

Fixed costs FC (English fixed costs) are costs that do not depend on the volume of production.

Variable costs VC (English variable costs) are costs that depend on the volume of production. Direct costs for raw materials, materials, labor, etc. vary depending on the scale of the activity. Overhead costs such as commissions to resellers, telephone charges, and office supplies increase with the expansion of the business and are therefore classified as variable costs in this case. However, for the most part, the direct costs of the firm are always classified as variables, and overhead costs are fixed (Fig. 10.1

Fig.10.1. Relationship between two types of cost classification

The sum of fixed and variable costs is the gross, or total, costs of the company TS (eng.total costs).

The division of costs into fixed and variable implies the conditional allocation of short-term and long-term periods in the activities of the company. Under the short-term understand such a period in the work of the company, when part of its costs are fixed. In other words, in the short run, the firm does not buy new equipment, does not build new buildings, and so on. In the long run, it can expand its scope, so in this period all its costs are variable.

Average cost

Average costs are understood as the costs of the firm for the production and sale of a unit of goods. Allocate:

Average fixed costs AFC (English average fixed costs), which are calculated by dividing the firm's fixed costs by the volume of production;

Average variable costs AVC (English average variable costs), calculated by dividing the variable costs by the volume of production;

The average gross cost or the total cost of a unit of ATS product (eng. average total costs), which is defined as the sum of average variable and average fixed costs or as a quotient of dividing gross costs by output.

Example 10.2. Calculate the average costs on the basis of the data given in 10.1

Table 10.1. Fixed, variable, gross and average costs of the firm

We see that the average gross cost decreases as output increases. This is because as production expands, the firm's fixed costs are charged to more and more products, making them cheaper.