Costing: how can I reduce my business expenses?
Posted: Mon Dec 09, 2024 7:18 am
Managing costs is very important for the company's financial health
Reading time: 4 minutes
In times of crisis like the one we are currently experiencing, it becomes increasingly necessary to control and reduce a company's expenses. This will allow it to increasingly increase its profits while remaining stable in the market. The big question is: how can this be done? To bc data mexico this end, a costing project will guide you and help you solve this problem.
But after all, what is costing?
Read also: HOW TO ORGANIZE AND REDUCE MY COMPANY'S COSTS?
What is it?
Costing is a service that identifies the costs and expenses involved in the production of a product. It is very important because this service helps a company solve problems such as the lack of knowledge of the cost and profit of each product. In addition, costing allows for the correct reduction of the expenses of a production as a whole, making it possible to achieve the desired profit margin.
Also, based on this mapping, it is possible to better understand which products are the “flagships” of a business, that is, essential for cash flow. This way, it is possible to work better on the quality and quantity of these products, obtaining a more detailed view of the company’s profitability.
But, first of all, you need to know how to differentiate costs from expenses, and identify their classifications.
Costs and expenses
Cost is everything that is necessary for production to take place, such as raw materials and equipment. Expenses include the essential resources for maintaining the company, for example, rent and internet bills.
An important distinction to make is between direct and indirect costs. Direct costs relate directly to production, such as labor, while indirect costs do not have a direct association with production, such as electricity.
Furthermore, costs can be variable or fixed . Variable costs are expenses that can change their value depending on the level of production and sales. Fixed costs, on the other hand, do not vary according to the progress of activities.
These distinctions are extremely important for the financial structuring of a production, as exemplified in the following case .
Hypothetical case on the importance of costing
Let's suppose that a snack bar is suffering losses, but doesn't understand why. Its sales are always active and the “cheese bread”, considered the business's flagship product, is highly sought after in the region.
The business owner, wanting to reverse this financial situation, bought the costing services of a consultancy and discovered the error. All the snacks were sold in approximately the same price range, but the cost to produce each one was different. The ingredients and quantities of each one were not the same, as well as the time and method of preparation.
Furthermore, it was noticed by analyzing this information that not all snacks were sold at the same frequency and proportion, but the general costs were equally distributed for each product. So, even if the “cheese bread” was sold a lot, this was still not enough to achieve a profit.
Based on this, the hired consultancy carried out a cost mapping and proposed suggestions for changes that the owner of the snack bar could implement in practice, so that he could achieve his final objective. It is important to note that this mapping can follow different methodologies, such as variable costing, absorption costing or ABC costing, which will be explained below. Read also: APPLICATION OF ABC COSTING: THE CASE OF A SUPERMARKET IN THE VIÇOSA REGION - MG
Know how to balance your costs to avoid losses
Variable costing
Variable costing is a simpler and more objective methodology. This method only considers variable costs in the final unit price of the product. In this case, fixed costs are not taken into account, as they will exist even if there is no production. Therefore, they are included as expenses.
This form of mapping produces valuable information, such as the contribution margin . This data indicates how much revenue will be left, after paying variable costs, to pay fixed expenses, such as rent.
Reading time: 4 minutes
In times of crisis like the one we are currently experiencing, it becomes increasingly necessary to control and reduce a company's expenses. This will allow it to increasingly increase its profits while remaining stable in the market. The big question is: how can this be done? To bc data mexico this end, a costing project will guide you and help you solve this problem.
But after all, what is costing?
Read also: HOW TO ORGANIZE AND REDUCE MY COMPANY'S COSTS?
What is it?
Costing is a service that identifies the costs and expenses involved in the production of a product. It is very important because this service helps a company solve problems such as the lack of knowledge of the cost and profit of each product. In addition, costing allows for the correct reduction of the expenses of a production as a whole, making it possible to achieve the desired profit margin.
Also, based on this mapping, it is possible to better understand which products are the “flagships” of a business, that is, essential for cash flow. This way, it is possible to work better on the quality and quantity of these products, obtaining a more detailed view of the company’s profitability.
But, first of all, you need to know how to differentiate costs from expenses, and identify their classifications.
Costs and expenses
Cost is everything that is necessary for production to take place, such as raw materials and equipment. Expenses include the essential resources for maintaining the company, for example, rent and internet bills.
An important distinction to make is between direct and indirect costs. Direct costs relate directly to production, such as labor, while indirect costs do not have a direct association with production, such as electricity.
Furthermore, costs can be variable or fixed . Variable costs are expenses that can change their value depending on the level of production and sales. Fixed costs, on the other hand, do not vary according to the progress of activities.
These distinctions are extremely important for the financial structuring of a production, as exemplified in the following case .
Hypothetical case on the importance of costing
Let's suppose that a snack bar is suffering losses, but doesn't understand why. Its sales are always active and the “cheese bread”, considered the business's flagship product, is highly sought after in the region.
The business owner, wanting to reverse this financial situation, bought the costing services of a consultancy and discovered the error. All the snacks were sold in approximately the same price range, but the cost to produce each one was different. The ingredients and quantities of each one were not the same, as well as the time and method of preparation.
Furthermore, it was noticed by analyzing this information that not all snacks were sold at the same frequency and proportion, but the general costs were equally distributed for each product. So, even if the “cheese bread” was sold a lot, this was still not enough to achieve a profit.
Based on this, the hired consultancy carried out a cost mapping and proposed suggestions for changes that the owner of the snack bar could implement in practice, so that he could achieve his final objective. It is important to note that this mapping can follow different methodologies, such as variable costing, absorption costing or ABC costing, which will be explained below. Read also: APPLICATION OF ABC COSTING: THE CASE OF A SUPERMARKET IN THE VIÇOSA REGION - MG
Know how to balance your costs to avoid losses
Variable costing
Variable costing is a simpler and more objective methodology. This method only considers variable costs in the final unit price of the product. In this case, fixed costs are not taken into account, as they will exist even if there is no production. Therefore, they are included as expenses.
This form of mapping produces valuable information, such as the contribution margin . This data indicates how much revenue will be left, after paying variable costs, to pay fixed expenses, such as rent.