Business Costs: Classification, Variability, and Accounting Systems

Business Fundamentals and Company Structure

It is essential that resources are spent or invested in creating high-quality products or services.

Defining the Business Concept

A company is defined as an entity composed of people, materials, machinery, equipment, infrastructure, technical capabilities, and financial capacity.

Types of Companies

Companies are typically categorized into three main types:

• Industrial: Petrochemical, Manufacturing, Food Processing
• Commercial (Shopping): Supermarket, Boutique
• Services: Cleaning, Training Company

The Importance of Cost Studies

Determining the Selling Price

The cost study allows us to determine the optimal selling price, ensuring coverage of all costs and providing a significant, prudent, and realistic profit margin.

Quantitative Cost Classification Methods

Classification by Accounting Accounts

Costs can be classified based on accounting treatment:

• Estimated Costs
• Current Costs
• Deferred Costs

Classification by Organizational Role

Costs are categorized based on the function they serve within the organization:

• Commercial Costs
• Industrial Costs
• Financial Costs
• Sales Costs
• Administrative Costs

Direct and Indirect Costs

• Direct Costs: Those that are easily and directly identified with the product or service offered.
• Indirect Costs: Those not easily identified with the specific product or service.

Classification by Variability

Variable Costs

Variable costs are those where the total amount of the cost varies in direct proportion to the volume produced or services provided.

Fixed Costs

Fixed costs are those whose total amount remains at the same level throughout a specific time period (e.g., month, quarter, or year), regardless of production volume.

Mixed Costs

Mixed costs possess both a fixed and a variable component. Their status may change abruptly when significant changes occur in the volume of production.

Core Purposes of Cost Accounting Systems

The main purposes of accounting and cost systems are:

• To prepare internal reports to monitor business operations and inform managerial decisions.
• To prepare external reports for investors, regulatory bodies, and other external agencies (e.g., tax authorities like SUNAT).

Cost Engineering and Essential Terminology

What is Cost Engineering?

Cost Engineering is the part of cost accounting that utilizes the most relevant cost elements for productive enterprises, trade, and service industries.

Cost Versus Expenditure

• Cost: A resource value that is directly or indirectly related to the product or service.
• Expenditure: An economic or financial outlay that is not related directly or indirectly to the product or service.

Expenses are classified as: administrative expenses, financial expenses, and selling expenses. The sum of all expenses is considered operating expenses.

Understanding Operating Expenses

An operating expense is any resource used to manage and finance the company, as well as to sell the products.

Qualitative Cost Classification

Key qualitative cost concepts include:

• Marginal Cost: The additional cost incurred when producing units beyond the budgeted volume.
• Hybrid Cost: A cost that integrates two or more elements of the cost structure.
• Sunk Cost: A permanent or inevitable cost that the company must always incur, regardless of future decisions.
• Allocated Cost (Fee Charged): A cost that is distributed (charged) between two or more areas or departments of the company.
• Social Cost: The cost perceived in the environment that affects a large number of people, often due to unmet societal needs or externalities.