A GENERAL DISCUSSION OF COSTS
Cost, revenue and profit are the three most important factors in determining the success of one’s business. A business can have high revenue, but if the costs are higher, it will show no profit and is destined to go out of business when available capital runs out. Managing costs and revenue to maximize profit is key for any entrepreneur. Thus, in the modern business world, managers are paying more and more attention to control the costs.
As a branch of accounting systems, cost accounting is particularly important in this area. For a successful manager, he needs accurate, timely and reliable information to make decisions to fulfill the goals of a corporation. These informations are provided by cost accounting which measures, analyzes and reports financial and nonfinancial information relating to the costs of acquiring or using resources in an organization.
One thing we should note is another term management accounting. In academia, scholars usually think collecting cost information is a function of making management decision, so the distinction between management accounting and cost accounting is not so clear-cut. Generally, we can use these terms interchangeably.
This paper will give a general discussion of cost, including the definition, classification, and changes in an organization regarding costs, etc.
II. Definition of Costs
In order to control the costs effectively, successful managers must understand the basic concept and nature of costs well. What are costs exactly?
When we study the costs from different angles, I think we can define costs in different ways. As far as I know, there are two concepts of costs:
The first one is a narrowly definition. Costs are all kinds of expenditures and outlays an enterprise consumed during the process of providing goods or services. In this definition, we can regard costs as manufacturing costs or products costs, including three cost items: direct material, direct labor and overhead. Other period costs, such as administrative expense, financial expense and sales expense are excluded from total costs. So this definition is served as calculating the primary cost of certain product, but not the total costs during operation.
The second one is more generalized. Some accountants define costs as resources sacrificed or forgone to achieve a specific objective. Except direct material, direct labor and overhead, period costs are included in this definition. So we can conclude that this definition is focus on the total sacrifice instead of separate products when study the costs. Furthermore, it served as managing the costs and helping managers to make decisions.
So in the study of costs, we can choose either definition to meet our needs.
III. The Importance of Costs
Why costs are important for an enterprise? I think there are following points:
* Cost reduction is the basic solution of increasing profits.
Profits = Revenue - Costs. In order to earn more profits, enterprise must increase revenue or decrease costs. Since revenue and costs are proportional, it means more revenue, more products produce and sale, and more costs. If we only pay close attention to gain revenue without decreasing costs, the profits will be diminished when growth rate of costs exceeds that of revenue. Only if increase the revenue and decrease the costs happen spontaneously, profits will grow rapidly.
* Cost reduction can preserve company resources and reduce waste.
The total resources an enterprise has are limited. If it can operate with fewer resources and produce more, the overall benefit will increase greatly.
* Cost control is a powerful guarantee of competitiveness.
During operation, an enterprise will face various pressures, such as industry competition, material costs rise and market fluctuation. Only controlling costs well, with a lower break-even point and a higher safety margin, an…