Analysis of firm costs
Posted: Sun Dec 22, 2024 8:34 am
Cost analysis is a key point in assessing the efficiency of a company's operations from a financial and economic perspective.
The main task is to evaluate the effectiveness of their use and develop strategies for their optimization.
The cost analysis process includes the following steps:
development of methods for collecting and analyzing information;
collection and aggregation of data to create reporting documentation;
performing additional calculations and email lists uk transformations with the original data;
performing the analysis in accordance with the established methodology and set goals.
After the assessment, specialized reports are generated by expense categories. The main purpose of these documents is to provide up-to-date and complete information on the organization's expenses, which is necessary for forecasting for future periods.
Analysis of firm costs
Source: shutterstock.com
The evaluation and analysis of enterprise costs are based on various mathematical equations.
The unified form for costs is:
Total Costs = Variable Costs + Fixed Costs
In generalized form, the equation can be expressed as follows:
Total costs = expense1 + expense2 + ...,
Cost efficiency reflects the profit for every ruble spent on production and sale of products.
The basic rule for determining profitability is to compare the profit received with the expenses that contributed to its formation. For example, to analyze gross profitability, it should be compared with the cost of production, and operating profitability - with the total cost.
Net profit is only applicable when calculating a firm's total costs to determine their profitability.
As an example of profitability analysis, one can use the product profitability indicator, which is defined as follows:
Profitability of production = Pr / (SP + KR + UR) * 100%,
Where:
Pr — profit from sales for the reporting period;
SP — cost price of production;
КР — commercial expenses;
MC - management costs.
If a company's revenues exceed its expenses for a given period of time, it can be said that the company made a profit during that period.
This indicates a good financial condition of the enterprise, which is illustrated by the formula:
Income - Costs = Profit
With constant income, a company can increase profits by reducing costs and production costs.
This approach to increasing profits faces certain limitations, since it is impossible to reduce costs indefinitely - at a certain point, cost reduction becomes unfeasible.
Analysis of firm costs
Source: shutterstock.com
When marginal costs to society exceed marginal private costs, a negative externality occurs. Therefore, an increase in a firm's marginal costs may lead to an increase in marginal social costs for third parties.
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Fixed Costs and Break-Even Point
The point of equality occurs when income equals expenses. The point is that all the funds received by the company were spent on paying expenses, and the profit is zero.
This point shows the minimum sales volume required to avoid losses. Anything above this point brings in profit, and anything below it brings in losses.
For example, a company sells children's overalls at a price ranging from 6,000 to 9,000 rubles per unit of goods, the average bill is 7,500 rubles.
Monthly expenses
Utility costs and rental costs 150,000
Amount of employee remuneration 150,000
Advertising 40,000
Other 20,000
Total: 260,000 rubles
Cost per unit of goods
Purchase of products 3700
Transportation 300
Piecework wages 1000
Total: 5000 rubles
TBU per unit of goods = sum of fixed costs / (price per unit of goods - sum of variable costs per 1 unit of goods)
260,000 / (7500 - 5000) = 104 units of goods must be sold per month to break even.
TBU in money = price per unit of goods x TBU per unit of goods
7500 x 104 = 780,000 rubles is the minimum revenue to cover the company’s expenses.
Costs, both variable and fixed, are directly related to the volume of production. There is a point where the revenue from sales of products covers all costs, and this is called the critical point. This moment means that the enterprise has reached self-sufficiency.
The main task is to evaluate the effectiveness of their use and develop strategies for their optimization.
The cost analysis process includes the following steps:
development of methods for collecting and analyzing information;
collection and aggregation of data to create reporting documentation;
performing additional calculations and email lists uk transformations with the original data;
performing the analysis in accordance with the established methodology and set goals.
After the assessment, specialized reports are generated by expense categories. The main purpose of these documents is to provide up-to-date and complete information on the organization's expenses, which is necessary for forecasting for future periods.
Analysis of firm costs
Source: shutterstock.com
The evaluation and analysis of enterprise costs are based on various mathematical equations.
The unified form for costs is:
Total Costs = Variable Costs + Fixed Costs
In generalized form, the equation can be expressed as follows:
Total costs = expense1 + expense2 + ...,
Cost efficiency reflects the profit for every ruble spent on production and sale of products.
The basic rule for determining profitability is to compare the profit received with the expenses that contributed to its formation. For example, to analyze gross profitability, it should be compared with the cost of production, and operating profitability - with the total cost.
Net profit is only applicable when calculating a firm's total costs to determine their profitability.
As an example of profitability analysis, one can use the product profitability indicator, which is defined as follows:
Profitability of production = Pr / (SP + KR + UR) * 100%,
Where:
Pr — profit from sales for the reporting period;
SP — cost price of production;
КР — commercial expenses;
MC - management costs.
If a company's revenues exceed its expenses for a given period of time, it can be said that the company made a profit during that period.
This indicates a good financial condition of the enterprise, which is illustrated by the formula:
Income - Costs = Profit
With constant income, a company can increase profits by reducing costs and production costs.
This approach to increasing profits faces certain limitations, since it is impossible to reduce costs indefinitely - at a certain point, cost reduction becomes unfeasible.
Analysis of firm costs
Source: shutterstock.com
When marginal costs to society exceed marginal private costs, a negative externality occurs. Therefore, an increase in a firm's marginal costs may lead to an increase in marginal social costs for third parties.
Recommended articles on this topic:
Examples of Marketing Strategies from Apple to Barack Obama
32 Ways to Attract Clients: Proven and Unconventional
How to Calculate Conversion: 3 Proven Options
Fixed Costs and Break-Even Point
The point of equality occurs when income equals expenses. The point is that all the funds received by the company were spent on paying expenses, and the profit is zero.
This point shows the minimum sales volume required to avoid losses. Anything above this point brings in profit, and anything below it brings in losses.
For example, a company sells children's overalls at a price ranging from 6,000 to 9,000 rubles per unit of goods, the average bill is 7,500 rubles.
Monthly expenses
Utility costs and rental costs 150,000
Amount of employee remuneration 150,000
Advertising 40,000
Other 20,000
Total: 260,000 rubles
Cost per unit of goods
Purchase of products 3700
Transportation 300
Piecework wages 1000
Total: 5000 rubles
TBU per unit of goods = sum of fixed costs / (price per unit of goods - sum of variable costs per 1 unit of goods)
260,000 / (7500 - 5000) = 104 units of goods must be sold per month to break even.
TBU in money = price per unit of goods x TBU per unit of goods
7500 x 104 = 780,000 rubles is the minimum revenue to cover the company’s expenses.
Costs, both variable and fixed, are directly related to the volume of production. There is a point where the revenue from sales of products covers all costs, and this is called the critical point. This moment means that the enterprise has reached self-sufficiency.