Academician, Prof. Dr Ibrahim Jusufranić, Rector, International University Travnik, Bosnia and Herzegovina
Introduction
Within modern business condition, the costs are the factor of crucial importance for the development of enterprises. It is always important to consider the costs when introducing new facilities and as well as for the sale of existing products. It often happens that due to poor management costs can occur loss in business. To avoid the occurrence of the loss of the company, costs are often reduced, while in the same time not taking into account the quality and price of products and services. Instead of that, companies need to focus on the area of cost management as the field among of the most important ones within the work of management through which it might reduce the costs, although not at the expense of employees or the quality of products and services.
1. Cost and Economy
The degree of satisfaction of social needs do not depend just of the volume of production, but also of the cost of production and trade. Expensive production makes the goods inaccessible to the consumer, even if it has all the attributes that make it competent for use. Low-cost manufacturing provides complete satisfaction of social needs and collective gains the capability to realize the higher mass of emolument. Therefore, costs are the key issue of each economy and each company individually. From the point of view of the economy, it would be most efficient if the production has no spending or expenses. Then the success of economic organization would be the greatest. Principles of economics consist in an effort to perform the tasks within the economy with the lowest possible cost of certain factors of production. The development of the productive forces of society, as the rule, manifests as increasing production and lowering the cost per unit of the product. The social system which does not provide that kind of development is not viable, and as history teaches us, must give up its place to another one - more advanced.
For every entrepreneur is especially important to collect, study and analyze different, concrete information connected with its business, process it in specific way as well. Every business decision has to be as close to secure the expected results because only in this way removes the uncertainty of business opportunities. Through the monitoring of costs and predicting their value in the future may direct each business activity. Knowing the basis of the theory of costs can greatly help within it.
The theory of costs is the part of microeconomic theory that studies the origin, characteristics and behavior of costs within business processes. The costs are defined as the consumption of various goods needed for the development of a product or service that will be realized by selling on the market. Costs are values expressed consumptions factors of process for the producing of effects, which are resulting from or are caused by the business activity of entrepreneurs.
The knowledge about the cost allows the entrepreneur to know the nature of the costs, their gestation, characteristics and behavior in the work process and to be able, through that, to reconcile policy costs with a policy of income in order to ensure satisfactory business operation and achieving of the highest possible profit. Therefore, the costs are never viewed separately from other categories relevant to business, such as for an example: revenue, cost, production volume, sales volume and similarly.
The evidence and control over the costs, which performs by the side of accounting, has three main tasks:
- to determine the difference between costs and revenues, or the loss or profit in the business,
- to measure the efficiency of businesses in relation to other competitors (cost effectiveness),
- to provide information basis for decision making (management accounting).
Having in mind that the application of the costs in divisions that precede business decision making is much diversified, in theory are defined numerous types of expenses. Their use in sharing enables more detailed monitoring, precise planning and more accurate measurement of aberration from the planned analysis, and in particular the management of costs.
2. Costs and Business Activity
In modern business conditions, the costs are the crucial factor for business activity, survival and development of enterprise. As the costs are relatively neglected economic category in terms of the influence which has on the business success of the company, it should be noted that the costs represent a stimulant and the key factor of the importance on the business success, development and business policy of the company.
Every systematization and classification of the costs, which occurs in economic theory and business practice, has its justification and significance, and therefore may be useful in studying, monitoring, analyzing and managing of the costs. Cost management is one of the most important fields of work of the Management.
This area is very important to consider when introducing new sales programs (products), and during the sales of existing products. When the company has very little space to maneuver in determining the sales price, their concentration is focused on reducing costs in order to achieve the targeted earnings. It is known that poor management of the costs may result the decrease of the value of the company.
An example is the case of beer production:
Joseph Schlitz Brewing Company is an American brewery, based in Milwaukee, Wisconsin, and once upon a time was the largest producer of beer in the United States. When were introduced cheap ingredients for the production of beer (1970), the quality of beer decreased, then fell the sales as well, and finally the price that led to the fall of the value of shares from 69 US dollars to 5 dollars (1981).
However, as opposed to cutting costs we have the cost management, in other words – as opposed to the "cost cutters" are "controls costs", ie. management that continuously and far-reaching is thinking about the costs and their reduction which will not be exclusively at the expense of employees or the quality of products or services. Therefore, these costs can be seen as an investment, through a COST-BENEFIT approach.
3. Management of the Costs
To be able to manage the cost, it is needed to collect them, classify, record and finally to analyze them.
The Management of the company wants answers, mostly, on the following questions:
- What are the real costs of production of finished products or purchase costs of finished goods and what influences their height?
- What management can do to reduce these costs, provided that the quality of products or goods remain the same?
- What costs are generated by sectors that are not directly associated with the production or procurement of goods?
- How to establish control over all costs and identify the responsible persons.
- How to motivate employees in a way to make each of them capable to, within the scope of personal responsibility, make an influence to reduce costs?
- Whether and how the organizational structure impacts on irrational spending?
In order to properly manage costs, it is needed for them to be properly classified by type and assign it to products, services, goods or centers of the responsibility. The division of costs by its types is considered to be natural or primary division of the costs. Such a division enables the determination for which purpose the certain costs are made for, or for what kind of needs they are incurred for.
Managing of the costs, the revenues and managing of the financial results out of the business activity during the accounting period or in general life cycle of enterprise, requires careful planning and control of business activities, as well as carefully measuring of the costs and revenue.
The main objectives of cost management depart from several activities such as:
- Planning and budgeting costs,
- The estimation of future operating results,
- Classification of the costs,
- Keeping the costs within acceptable limits,
- Selection of the optimal basic alternatives and necessary corrective actions,
- Establishing of the accountability for the costs and the similarly.
This requires that data about the costs to be particularly systematized and classified.
4. Calculation of Success by Products
The company could produce more varieties of products, which have different passing within the market, the market price, demand. The products may have a different cost price, because they are made of material of different quality. For the company is important to know the cost of each individual product, its market price, sales volume, so that it can maximize the total profit of enterprise, with forcing products that have the greatest success in the market.
Before the decision is made that the product which does not bring the planned income is excluded from the production program it is necessary to analyze:
- Whether there are other products that can be sold with the mentioned product;
- Whether it is a product through which we exploit the production capacity for the production of other products on which higher earnings are generated,
- Whether the other products are able to endure the common costs which are related to the production of the one which is excluded from the production program.
When the manufacturer for a long time sells its products under the planned profit, in that case he may decide that certain products should be excluded from the product range and to destine only for the production of those through which he is achieving the planned profit. However, before one so drastic decision it is needed to make a detailed analysis, from which should burst out the proposal about the possible reduction of direct and common costs.
Example: The impact of the costs on profit
Profit is defined by the level of the costs
Revenue - Expenses = Profit
(Amounts in US Dollars - $)
|
Revenues |
Expenses |
Profit |
Increase or decrease in profit |
|
500.000 |
300.000 |
200.000 |
|
|
Increase revenue by 10% is resulting in an increase of profit by 25% |
|||
|
550.000 |
300.000 |
250.000 |
+25% |
|
Reducing costs by 10% resulting in an increased profit by 10% |
|||
|
500.000 |
270.000 |
230.000 |
+15% |
If the Management wants to increase profit by 10%, then it must either increase revenues by 4% or reduce the costs by 6.6%.
Conclusion
The special importance for the successful business activity of enterprise is to determine the cost price of each product as well as to know the relationship between the market price and the sales volume in order to maximize the total profit of enterprises as one of the main objectives of the establishment and operation of enterprise. It is necessary to know the costs and their impact on the success of a business enterprise to guide such a policy, so that the cost management emerges as one of the most important areas of work of the Management.
Literature
1. Jusufranić, Ibrahim, Prof. Dr (2012): Managerial Economics, International University Travnik in Travnik, Travnik, Bosnia and Herzegovina (2012)
2. Jusufranić, Ibrahim, Prof. Dr: Enterprise Economics (book within the preparation), International University Travnik in Travni, Bosnia and Herzegovina
3. Jusufranić, Ibrahim, Prof. Dr: Engineering Economics (book within the preparation), International University Travnik in Travnik, Bosnia and Herzegovina.
4. Škrtić, Marica (2005): Cost management in order to increase competitiveness, Book of Proceedings: Cost management - Increasing the competitiveness and success of business activity, "M.A.K.-Golden", Zagreb-Zadar, Croatia
5. Marijan, Karić (2008): Cost Management, Faculty of Economics in Osijek, Croatia
6. Marijan, Karić (2003): Management Accounting, Faculty of Economics in Osijek, Croatia