THE COSTS
USE OF COSTS

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  • Cost-Volume-Profit Analysis
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                                                       .
    USES OF COST DATA

            The cost information is used for two purposes in most organizations: 1) the cost accounting systems provide information to evaluate the performance of an organizational unit or his manager, and 2) also provide the means for estimating the unit cost of products or services that the organization can manufacture or provide to others.

    a) Performance measurement. This measurement can be done by comparing current costs with those who were expected - or standard costs budgeted cost - to the degree of knowing which of them have been controlled. Deviations of expected with the current - variances - can be identified, evaluated and discussed by managers.

    b) Cost of goods and services. In manufacturing companies, the costs of goods must be measured to determine the cost of items transferred from work in process inventory to finished products. To meet the demands for information, a cost system should measure all the costs of manufacturing process and allocate a portion of those costs to each unit of output. The costs to obtain, maintain and manage the manufacturing plant or building should be added to the cost of material and productive work that requires each unit. The first are called indirect costs and the two last are called direct costs.

    c) Profit analysis. Information in costs is essential to analyse the profits obtained from a product or product line. The information on the cost of a product enables managers to assess the contribution margin - the difference between the price and variable costs - and the gross margin - the difference between the price and the total cost of the product.

    d) Product mix. For the companies that offer more than one product or service the cost information is key to handle the mix of products or services offered to customers. With information on cost-profit, a manager can lead the effort in sales and advertising for products that generate greater value. The products that do not create any profit can be removed, have a price reassignation, or tied up with products that have greater utility.

    e) Price assignation. Regardless of where prices are determined by the forces of market demand, product differentiation and advertising offer to many managers some sort of idea to assign prices to products or services. The costs of products and trends commonly offer signals to managers that prices should be changed. An example could be the change in the cost of a material or critical component which can give a signal to reassess the price of a product or service.

    f) Cost of service. Many products require the seller to provide additional services to customers. In such cases, the information about the cost of service is so important for managers as the cost of production. The same for companies that offer services only, unless the cost of service is measured, there is no way to know whether providing the service is profitable or not, or whether changes in prices or advertising are needed.

    Looked from another angle, the uses that the administration of a company can give to the costs can be grouped into 4 categories, specified below:

    COST OF GETTING COSTS
    It provides reports on profits and valuates the inventory.
    COST OF PLANNING
    Set goals and select roads economic-financial, leading the company to its achievement, from where you are.
    COST OF CONTROLLING
    Allows know if the targets set are being reached and in turn, serves as a basis for taking corrective actions.
    COST OF DECISION MAKING
    It provides information to select the best alternative.

    THE COST OF ANYTHING DEPENDS ON THE PURPOSE TO DETERMINE THE COST

    * COST OF GETTING COSTS
    As mentioned before, "cost of getting costs " means to provide reports on costs for measuring profits and valuate inventory.
    Ilustration:

    Price - Cost = Profit



    * COST OF PLANNING
    The "cost of planning" are used to define objectives and select roads economic-financial, leading the company to its achievement, from where you are.
    Illustration:

    Decide today what should be done in the future

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