Costs are a necessary part of business and include and outlay of value from a business. Generally, the outlay is being exchanged for revenue or something else larger than the outlay made. Otherwise a firm will not last in business very long because they will not be making profit and will probably be operating at a loss. I understand this basic definition of costs, it seems quite straightforward. I know that at my workplace there is cost which are unavoidable or necessary to sell houses (such as an advertising listing on realestate.com.au). Although as I read the Study Guide, Martin describes that it can be quite difficult for managers within a firm to fully understand their costs. I wonder if this could be because the costs are so large, they are hard to grasp? Or for what other reason could it be hard to understand costs?
Cost objects are categories in which costs can be allocated to in order to understand overall firm costs easier. I assume this is similar to how we separated expenses on our restated financial statements into operating and finance. Cost object sound like they are large bins which we dump certain costs into, which seems straightforward. I have noticed the financial statements for my company do not list cost in their most basic form such as rent or utilities so possibly could these cost objects be the categories which are displayed on the company’s financial statements? The Study Guide implies that it is trickier than that which makes me anxious. Throughout this course there have been many concepts that have seemed “easy” when I have read about them, but the proved to be frustrating and complicated when I have tried to put them into practice, particularly when completing my company spreadsheet.
A cost object can be any activity or item of a business. From the Study Guide it sounds like a cost object can be absolutely anything. I work at Ray White Singleton and I imagine the cost object could be a property we have listed for sale. For example, the cost object would be 64 Dangar Road, Singleton and I think the costs that would be allocated to that property (cost object) would be the marketing expenses such as online advertising on realestate.com.au, signboard, vendor gifts. I wonder if I would even allocate something as small as the ink which is used to print the brochures and window display. Or if something like ink would fall into a different cost object such as stationary? Now I am starting to see how there could be many blurred lines when it comes to cost objects.
Costs object can be products and because products usually take some time to be produced or sell, it is common for a firm to have an inventory of uncompleted products or materials. It is important consider both the cost of these products as well as the possible revenue in a period because if we only considered the cost, we would be understating the firms value. And the reverse can happen if a product is sold in a period which the costs of producing the product were not incurred. To avoid under/over stating a firm’s value, the inventories must be valued. I wonder what happens if the products never sell? When would the costs be considered? I have seen on my company’s financial statements that there are some items listed which say “will not be allocated to profit and loss” or “will be allocated to profit and loss” and I wonder if eventually a product did not less would it be “allocated to loss”?
Direct costs are costs which are easily and clearly allocated to a cost object. I will use my above-mentioned example again to explain. An advertisement on realestate.com.au for 64 Dangar Road, Singleton would be a direct cost for that cost object (being the property) as the entire amount of outlay is directly spent to assist in the selling of that property. However, coming back to my question about the ink that is used to produce brochures and window cards – I believe this would be an indirect cost because while a small portion of the ink may be used for this cost object, the entire ink cartridge will not be used for this single cost object. Some of the remaining ink in the cartridge could be used to print employee pay slips which is completely unrelated to the subject cost object. Also, when my boss speaks about our overheads, he talks about rent, internet, phones and “office expenses” which includes ink as well as other stationary because he considers this his fixed costs. Whether we list 64 Dangar Road, Singleton (cost object) for sale or not, he still must pay our overheads including the ink as we will need it to print other things. I really hope my understanding of this is heading in the right direction.
There is a difference between services and products. Products are the physical item provided to a consumer while service is the act of providing something to a customer. I understand the example in the Study Guide about a meal being a product and the waitress providing a service but it has got me wondering about where you draw the line. For example, my Mum worked at the King Gee factory when it was still operating in Australia. I would consider this a manufacturing/product industry with the products being apparel. However, was my Mum providing a service by sewing the apparel? Is this not considered a service because she does not have a direct connection with the consumer? Whereas a retail assistant in a store which sells the clothing would have a direct connection to the consumer, therefore rendering that a service? Similarly, when a dressmaker creates a dress for a customer, I would consider this a service and product transaction, and it is very similar to my Mum working at King Gee but I have a feeling my Mum is not going to be considered providing a service.
Apportioning of indirect costs is a method used to allocate certain amounts of overhead outlays to particular sections of the business. Other than the example Martin uses in the Study Guide about apportioning costs to departments based on how many staff were in the department, I am struggling to think of another way which indirect costs could be apportioned. I also think it would be hard to create “equal” cost objects and by this, would it be “correct” to have one cost object as a department and another as a process (like mixing in Cadbury case)? Rather than having two “comparable” cost objects being two staff departments. Do the cost objects need to have the same features?
Fixed costs are cost that remain the same for a firm even when production rises or falls. For example, a coffee shops rent will remain the same regardless of how many coffees it sells. Variable costs are costs which increase or decrease depending on the level of sales/products. For the coffee shop, coffee cups would be a variable cost because this cost increases as more coffees are sold. I have also learned about fixed and variable costs in ECON11026 and I think I have a fairly good grasp on it so I am not too concerned about this concept.
Martin argues that each time a firm does something a cost is incurred. I can understand this concept is quite true. For example, everything I can think of that I do at work costs, such as using the computer (cost of internet), going to an inspection (cost of petrol) and answering the phone (cost of phone bill). However, it does make me wonder if when an item is sold, that particular transaction does not cost anything? I mean the production of the product does, yes, but the act of selling the product does not? Although I suppose this is probably not true because when and the item is sold it must be paid for. It could be paid for on the eftpos machine and that costs money to operate (electricity and internet connection). Therefore, I would have to say I agree with Martin – everything a firm does costs.
The higher the fixed costs of an operation are, in relation to the variable cost, the higher the operational risk is. I understand this means that activities that incur large overheads are riskier because there is more pressure on the level of output of the product to cover the fixed costs of the operation. For example, my Sister creates beautiful macramé wall hangings and sells them. She had two options when she started this venture– open a store in town to sell the wall hangings or sell the wall hangings on Etsy. If she went with the first option, she would have large fixed costs being rent and utilities. However, she went with the second option because it has low fixed costs (well essentially it has no fixed costs). The only cost she incurs is the cost of materials (variable) if she sells a wall hanging. This was a far safer option for her because if she does not sell any wall hangings, she does not incur any costs (she makes the wall hangings as they are ordered).
The break-even point is the point at which total revenue is equal to total costs. I think of a firm being at break-even point kind of like a car being in neutral. If the firm was above break-even then the car would be in drive and if the firm was below break-even the car would be in reverse. For my example about my sister and her wall hangings, I think her break-even point would be when she sells a wall hanging for the exact price it cost her to purchase the materials plus her time spent making the wall hanging. If the cost of the materials was $60 on string and $20 on timber, plus her time spent was 5 hours (she values her time at $20 per hour, so 5 x 20 = $100) she would need to sell the wall hanging for $180 to break-even.
I have had less questions about this Study Guide chapter than previous chapters – which I hope means I am gaining a better understanding of this course. I also think that the other two subject I am studying this semester (ECON11026 and FINC19011) have a significant amount of cross over with concepts explored so this may be helping me as well. After reading this chapter I am looking forward to continuing in this course… but mostly I am craving Cadbury chocolate.
Make it Account 