Measurement and valuation of the consumption carried out or foreseen by the rational application of the factors for a certain objective, for example obtaining a product, job or service.
Under this perspective, cost is considered as a relevant quantity for the calculation of the internal result, in an analogous, but differentiated way, to the "expense" magnitude, which would be the relevant quantity for the calculation of the external result.
The term costs can be used in such a variety of occasions that it is recommended to use it with an adjective or phrase that explains its meaning. For example, the cost of an object can refer to its historical cost, opportunity cost, replacement cost, standard cost, estimated cost, direct cost, variable cost, and so on.
Costs of sale
Costs of the goods or services that are sold. Also known as costs of goods (or services) sold.
Historical costs
Economic sacrifice required, or would be required, to acquire or produce a good or service.
Therefore, it constitutes the amount of cash, or its equivalent, paid to obtain a good or service.
Subsequent to its acquisition, the historical amount can be adjusted by means of amortizations.
Historical cost has been subject to wide controversy, arguing that this type of cost does not provide a reasonable basis for management to take action and evaluate expenses.
On the other hand, it is argued that, as evidenced by the “cost-benefit analysis” technique, accounting systems cost.
Indeed, it is frequently necessary to keep historical records to satisfy various legal requirements; therefore, the "historical costs" cannot be ignored. There are not a small number of managers in the financial and cost sectors of a company who are convinced that the historical cost allows achieving the congruence of objectives pursued by the management team.
The "historical cost" or "acquisition price" is one of the so-called "generally accepted accounting-financial principles".
Expected costs
Economic sacrifice that, according to the available information, it is estimated that it will be necessary to carry out, at a given future moment, to acquire or produce a good or service.
No forecast cost or projected cost.
Unit cost
Cost of producing a unit of product or service, generally based on averages and taking into account the costs of all the productive factors involved in production.
Costs of a selected unit of a merchandise or a service.
Examples: costs per ton, per machine hour, per hour of labor, or per department hour.
Therefore the unit cost is an average cost for the period under consideration, and globally, therefore, it corresponds to the sum of the unit costs of production inputs such as direct material, direct labor, and indirect manufacturing costs., in the case of the unit cost of production. This cost can also be obtained from the total monetary values of the production inputs divided by the total number of units produced. A more general expression of this concept may include production costs in order to obtain a total unit cost.
Costing
Process for determining the cost of activities, processes, products or services.
Analytical costing
The one that includes expenses directly attributable to production, except for the part that was not taken into account due to the fact that the facilities intended for production could not be fully used.
This category of costing is used to measure the proportion of recurring and continuing expenses to be included in the computation of costs, by comparing, with a predetermined standard, the real rhythm of activities of the economic unit.
Expenses corresponding to a given period are included in the cost to the extent that the available capacity was actually used; and the portion of the expenses assigned to the unused capacity is considered as a loss. This represents, in fact, an economic loss attributable to the fact that the production of the period was lower than normal and is not part of the cost of the units actually produced.
Direct costing
Also known as variable costing or marginal costing.
It is the type of product costing in which the fixed manufacturing indirect costs are immediately charged against the income corresponding to the period in which the need to impute them to the specific units produced was incurred. It can also be interpreted as costing that includes expenses that are directly attributed to production and that tends to increase or decrease in proportion to variations in the rhythm of operations, excluding fixed indirect costs.
From a more traditional perspective, direct costing is defined as the segregation of manufacturing costs between those that are fixed and those that vary directly with volume.
This type of costing therefore implies that none of the recurring and continuous production overhead will be included in the cost of inventories. The main components are depreciation and maintenance of plant facilities.
For the evaluation of inventory stocks and cost of sales, only the prime costs plus the factory costs are used.
The rest of the factory expenses are charged to the results of the period. It must be recognized, however, that the direct current cost consists substantially of a segregation of expenses and only secondly an inventory evaluation method.
Functional costing
Labor of classifying costs by assigning them to the various functions performed, such as manufacturing, warehousing, invoicing, and distribution.
Trade costs
Costs derived from the activities related to the commercial area of the company, and which are usually considered as period costs.
Within this cost classification, one can distinguish between variable costs and fixed costs; Variable costs are made up of concepts such as: packaging, transport costs on sales, commissions on sales, billing costs, etc., which, in order to speed up budgeting work, are usually estimated by applying a certain percentage on volume. of sales.
Regarding the structural or fixed costs, it is convenient to make the distinction between:
a) Direct and indirect costs regarding a product or product line.
b) Inevitable costs and avoidable costs; This last classification allows determining, at the time of estimating the loads, those that, even when they are independent of the volume of activity, can be readjusted according to the foreseen circumstances for a certain exercise. In general, the calculation of the cost of the product is carried out excluding commercial costs.
Shared costs
Costs that benefit more than one type of product, or more than one subdivision of the company, and that cannot be directly identified with specific product units or subdivisions.
Committed costs
They are fixed costs that derive from owning an industrial plant or installation, equipment and a basic organization; such costs are fundamentally affected by long-term decisions that have to do with the desired level of capacity.
Common costs
Costs of the production factors necessary for the set of products, when two or more types of products arise from a single production process.
Joint costs
Costs derived from a production process in which two or more products are inevitably obtained simultaneously, therefore it is not possible to identify them with a particular product.
These are costs incurred by the company in its processing before the "separation point".
Controllable costs
Costs related to those factors over which a manager can exercise control over a period of time.
The separation of costs into: controllable and non-controllable, is necessary for the implementation of an effective management control system, because it allows guiding the actions of the different managers towards the objectives of efficiency and effectiveness, with a view to achieving improvement. constant of the company's actions.
The allocation of costs to the responsibility centers is based more on knowledge and information than on control. It is interesting to know who is the person who can explain or predict the behavior of a certain variable in the income statement (price, consumption, etc.) regardless of the degree of control that said variable may exercise.
Administration costs
Costs corresponding to the area that companies undertake a set of functions related to their administration, management, organization and control.
In general, these costs are treated as period costs and not as product costs, which is somewhat justified since it integrates activities aimed at supporting all the functions of the company and, therefore, independent of the volume of production, or product line; thus, it would be really arbitrary to try to assign them to the production of an exercise because they lack objective criteria for said allocation, something that does not happen with the production activity. Its consideration as period costs avoids the need to distribute them among the products.
Storage costs
Costs derived from the existence of warehouses in the company, destined for both direct and indirect materials that are applied to the production process. It is, therefore, costs derived from tasks such as: conservation; heating; refrigeration; insurance; amortization; etc, and that they are generally fixed and independent of the quantity of materials stored; However, in parallel, costs may be incurred whose amount depends on the nature and quantity of items stored, especially when they require special attention.
Capacity costs
Alternative term to “fixed costs”, in which it is emphasized that, in an economic unit, this type of cost is needed to provide them with operational facilities and an organization in a position to produce or sell at a planned volume of activities. It is, therefore, the fixed cost derived from the resources consumed in a period in order to maintain the production or sale capacity of an economic unit.
Capacity has three dimensions:
a) Physical capacity, referring to properties (buildings, equipment, etc.)
b) Organizational or institutional capacity, which is that provided by the Management and the different levels of human resources.
c) Financial capacity, from working capital or working capital and other financial resources.
In all three cases the capacity changes only slowly. Indeed, it takes time to think about new facilities, carry out the financing procedures, complete the construction of the facilities, hire the necessary human resources and put these resources into operation.
On the other hand, capacity reductions also take some time.
All this means that during any short period of time, the economic unit will have to operate with a relatively constant existence of productive resources, including among them those of an organizational nature and financial ones.
Idle capacity costs
Variation attributable to the lack of use of the means of production, according to the projected indices, which is considered a specific item in the income statement.
Conversion costs
Costs necessary to transform raw material into finished products.
Distribution costs
All costs incurred from the time the product is manufactured and goes to the warehouse, until it is sold and a sale price is charged.
Structure costs
Corresponds to the costs of the resources assigned to solve the infrastructure from which the operating activity is carried out, including the costs of the administrative and marketing structures, since the costs of the production structure are attributed to the operating function itself said and make up the so-called “indirect fixed production costs”, which are applied to production using the absorption costing technique.
Operation and maintenance costs
Repeated costs generated by the exploitation of physical assets and the maintenance of their value.
Difficulties often arise in distinguishing whether maintenance costs are current or capital expenditures, but analysis of the updated liquidity stream makes the distinction unnecessary.
Manufacturing costs
Costs linked to those activities that directly affect the manufacturing process, including the following: material handling; time recording; QA; supervision; maintenance; cleaning; etc. It is, therefore, a category of costs linked exclusively to the execution phase, or that of obtaining the output, and which, generally, are a consequence of the prior planning that has been carried out of the process of obtaining the product.
Inactivity or overactivity costs
They refer to a certain level of production and must be imputed to the result of the fiscal year or period in which these events are verified, without consequently modifying the common manufacturing costs represented by the quota, and therefore the costs of the finished product.
Research and development costs
Different types of costs derived from research activities (primary) and development (subsequent) carried out in a company.
Generally, companies do not usually include research and development costs in production costs, given the unique nature of this activity compared to the rest of the company.
The uncertainty to which the financial resources that companies allocate to research activities are subject is known, since the results are often uncertain, intangible and, sometimes, very difficult to quantify; In addition, it often happens that there is a significant delay between the costs incurred and the results of the investigation.
Labor costs
Substantial component of the economic added value of the company, which corresponds to the application of human effort in the process of business activity. Only those personnel expenses incurred by the company and which must necessarily be recovered in the operating cycle or accounting cycle should be considered as such costs.
In principle, this concept does not include those expenses of an activatable nature, but the consideration that the worker receives directly for the work performed, as well as the charges associated with it, both mandatory and voluntary.
Indirect labor costs
Considerations and social charges corresponding to personnel who do not participate directly in the manufacture of the product and are dedicated to material handling, maintenance, quality control, inspection, etc.
Materials costs
It is the value of raw materials and other less important materials, which are used in the production process.
In this way, the materials can be classified as direct (raw material) or indirect (other materials used).
They are the typical example of a variable cost, and that is found in the finished product, in the same state or with modifications of a physical type (changes in size and / or packaging, eg: fractionation) or with chemical modifications. (changes in the structure of the element, eg transformation of sugar into caramel).
Opportunity costs
The measurable cost or sacrifice of rejecting an alternative, selecting another, in choosing alternative courses of action or strategies.
From another point of view it can be considered as the loss of alternative income, product of the decisions taken. Thus, the opportunity cost may represent the benefit that is overlooked or discarded as a consequence of the choice made.
Production costs
Raw material, labor, factory load, administrative costs and financial costs, whose information is provided by Cost Accounting.
Monetary quantitative expression of production factors, previously acquired or contracted, that are consumed in a process and that, for technical-economic reasons, must necessarily be included in the manufactured product.
They are structurally made up of three elements: raw materials, direct labor and factory load. \\ Include all identifiable costs (fixed and variable), namely:
a) Raw materials (according to invoice price and related expenses)
b) Labor (according to direct wages of the production process)
c) Indirect manufacturing costs (according to remaining costs)
Economic sacrifices necessary to obtain production, accrued in function of it.
Rework costs
Higher expenditures produced by faulty jobs so that they can meet the general specifications. The theory of cost accounting advises including them among the common costs of manufacturing or factory load.
Degressive costs
Expenditures and expenses that fluctuate in smaller proportion than the variations of the production.
Conversion capital costs
Costs for the contribution of the affected assets to the production process, which is obtained based on the opportunity cost of the market.
Differential costs
Costs incurred before different possible alternatives that are compared for decision-making, all costs, both fixed and variable, as productive or non-productive, must be analyzed. They can also be considered as those costs that will be incurred if an alternative is put into practice and that differentiate between one strategy and another.
These are costs that can be increased, decreased or modified, as a result of the selected strategy.
Direct costs
They are those costs that can be clearly and unequivocally identified, and therefore be directly linked to the object of costs, for example, the product, service, line or activity, and which are individually controlled economically in the process of imputation to the cost targets.
Standard costs
They are predetermined costs, used in the field of production with the purpose of improving efficiency and control in the management of the production process.
They have a character of dominance over real costs, so they translate into the costs that should exist or be incurred in the company; therefore, any variation that is verified in a positive sense (below the standard), or in a negative sense (above the standard), is considered as efficiency or inefficiency in the production process, respectively.
Expired costs
Services and goods whose property is transferred or consumed in the process of obtaining income.
Fixed costs
Costs whose magnitude is not influenced by variations in the activity level of a business unit, and therefore do not vary in the face of changes in activity levels that originate within a relevant range, constituting its defining characteristic. In any case, although the variations included in a certain activity interval these costs usually remain unchanged, an increase or decrease in said activity interval may entail a modification in the structure and amount of these fixed costs.
Fixed structure costs
These are the sunk costs related to the installed capacity of the organization. They are not susceptible to elimination or reduction in the short term and still exist in plant shutdown and without operations (in some countries they are also called unavoidable fixed costs).
Fixed operating costs
They are those fixed costs that arise when the organization's operations begin, not being susceptible to being eliminated in the short term, and that will not exist in shutdown plant conditions and without operations.
Fixed costs of production preparation
Costs that, as long as the company remains inactive are not incurred, although the manufacture of the first unit determines its appearance and subsequent maintenance.
Avoidable fixed costs
Certain fixed costs that can be adjusted from one exercise to another without the need to make divestments. In some cases, this adjustment may be carried out within the fiscal year itself, provided that they have not accrued at the beginning of the corresponding fiscal year.
Unavoidable fixed costs
Costs incurred by the mere possession of structural means that are used in a certain activity and that are usually unavoidable, in the short term. The total or partial elimination of this type of costs would imply a process of divestments, or liquidation of the pre-established structure.
Financial costs
Costs inherent to the financial resources used by the company for the development of its activity; In general, it can have two meanings: In a first one, the financial cost can be defined as the average cost that the company bears as a consequence of the financial policy of indebtedness maintained during a fiscal year; This cost is not usually included among the production costs, except in the case of long production processes (warehouses, shipyards, construction companies, etc.), where the cost derived from the foreign capital invested in the process is as important as any other productive factor.
In a second sense, the financial cost can be conceptualized as an opportunity cost or charge attributable to the investment held in the factory and in other assets necessary to carry out the transformation of the inputs. Generically, the financial cost is evaluated based on the returns that could have been obtained if an alternative use were made to the capital invested throughout the production period.
Some companies consider financial costs as indirect costs of production and, therefore, one more element of costs of output, especially when trying to evaluate the suitability of certain alternatives (for example, buying new machinery or maintaining the old one).
A rigorous analysis of this approach is complex given the alternative factors that can be integrated under the concepts of capital costs and investment.
Sunk costs
These are historical costs, derived from past decisions, whose amounts no longer represent adequate benefits for future operations, unless a decision is made to repower them.
One of the characteristics of these costs is that they are irrevocable, and others that they are irrelevant for short-term decision-making in the company.
Indirect costs
They are those costs that are not directly identified with products, services, lines or activities, or that it is not economically advantageous to measure them to assign them individually. Normally, these are groups of costs that need to be measured and applied to production through distribution keys, largely subjective.
Indirect material costs
Those costs that, identifying with all the materials purchased at once and not with one material, meet the following conditions:
1st) They take place before the entry of the materials acquired in the warehouse.
2nd) They are supported by the acquirer. These indirect costs of purchased materials include: transportation, freight, insurance, non-recoverable taxes directly from the Public Treasury, etc.
Indirect transformation costs
Indirect production costs not included as indirect materials or labor; therefore, this cost classification will include a diversity of costs that are difficult to group under another category. Among the concepts included under this heading, the following can be mentioned:
1) Maintenance of: a) Buildings. b) Machinery and tools. c) Furniture and fixtures. d) Transport elements.
2) General costs (of a fixed nature): a) Amortization of buildings. b) Property tax. c) Insurance. d) Leases.
3) Supplies: electric power, heating and light.
4) Costs derived from the existence of special services departments: a) Warehouse. b) Sanitary. c) Dining rooms. d) Security, etc.
5) Various indirect costs: a) Royalties. b) Special taxes. c) Defective materials. d) Damaged goods, etc.
Irreversible costs
Semi-fixed costs that, once they increase (by sections) do not decrease, even after returning to the previous situation.
Mixed costs
Costs that have fixed and variable components.
Uncontrollable costs
Costs over which the head of a center cannot exert any influence, as he is not authorized to do so. In this case, it is about costs passed on to a department as a consequence of the reassignment of certain cost concepts to the different departments of the company; for example, the allocation of the rental costs of the building to the departments can be carried out with more or less objective criteria, but in no way its management depends on the head of the department.
