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Economy of the enterprise - Pokropivny SF

16.2. Cost management in the enterprise

Cost Management System

Cost management is the process of purposeful formation of costs by their types, places and carriers with constant monitoring and stimulation of their reduction. It is an important function of the economic mechanism of any enterprise.

The cost management system has functional and organizational aspects. It includes the following functional subsystems:

• Search and identify resource-saving factors;
• Rationing of resource costs;
• Planning of resource costs by their types;
• Accounting and analysis of resource costs;
• Stimulating savings and resources and reducing their costs.

These functions perform the relevant structural units of the enterprise, depending on the size of the latter (departments, bureaux, individual performers).

The identification and use of resource saving factors is the responsibility of every employee of the enterprise, especially professionals and managers at all levels. In accordance with certain organizational and technical conditions and adopted decisions, the norms of expenditure of all types of resources are developed: raw materials, basic and auxiliary materials, energy, labor resources.

The establishment of rates of expenditure is the determination of the costs of certain types of resources in these organizational and technical production conditions. These norms are an important factor in ensuring the economy regime and, accordingly, the competitiveness of the enterprise. In the planning process, the maximum (permissible) total costs in the units and, in general, for the enterprise (estimates) and per unit of output are established. The actual level of costs is calculated according to the current accounting.

Comparison of actual costs with planned (normative) allows during the analysis to assess the work of the units on the use of resources, to find out the reasons for deviations of actual costs from planned ones and, accordingly, to stimulate the employees of the enterprise in the direction of their reduction.

Formation and control of costs in places and centers of responsibility

Management of costs at the enterprise provides for their differentiation in places and centers of responsibility. The cost center is the place of their formation (workplace, group of workplaces, site, shop). Under the center of responsibility understand the organizational unity of cost centers with the center responsible for their level.

In practice, it is considered that the responsibility center is the same as the cost center, although this is not necessary. The formation of cost centers and responsibility centers is carried out according to functional and territorial features. In the first case, costs are localized in a certain functional area of ​​activity (marketing, research and preparation of production, logistics, production, maintenance of production, management). Territorial cost centers and responsibility centers include organizational units of the enterprise (departments, sections, shops), which are separated spatially.

Estimates are compiled on the responsibility centers (planned costs), actual costs are determined, and production costs are calculated for production units. This allows you to monitor the use of resources. In this case, it is important to divide the costs applied to each center of responsibility to direct and indirect, variables and constants. The first division is essential to determine the cost of individual products (calculating). Direct costs are directly attributed to the production of responsibility centers (cost centers), and indirect costs are formed in these centers, and then distributed among separate types of products. Separation of costs for variables and constants by responsibility centers (cost centers) is important for the preparation of so-called flexible estimates and performance evaluation. Such a differentiation of costs allows you to quickly determine estimates for different production volumes, and also recalculate planned costs for the actual volume of products during the analysis and evaluation of the work units.

Analytical aspects of the relationship between variables and fixed costs

The distribution of costs for variables (proportional) and constant can be used to determine their total amount for a certain period using formula

C = C per • N + C post, (16.2)

Where C is the total (cumulative) cost;

C is the variable cost per unit of output;

N - volume of production in kind;

With post - constant costs in a given period.

By a simple transformation of formula (16.2), it is possible to determine such costs per unit of output ( C unit). In this case, the formula takes the following form:

(16.3)

From formula (16.3) it is evident that with the growth of the volume of production, its cost is reduced by constant costs. Therefore, the increase in production is becoming an important factor in reducing the cost of production.

This pattern is taken as the basis for the analysis of the dependence of costs and profit on the volume of production to determine the best options for design and planning solutions. And in this case, it is advisable to use a graphic representation of the process. In Fig. 16.4 shows the linear functions of the dynamics of costs and revenues from the sale of products.

Due to the presence of constant costs, production of products up to a certain critical volume ( N cr) is unprofitable - the shaded area 1. The critical volume of production is widely known and under another name - the break-even point. As the volume of production increases, the share of fixed costs in their total (aggregate) value decreases, losses decrease, and after reaching the critical volume ( N cr) production becomes profitable - the shaded area 2.

The critical volume of output of a certain product in the natural measurement, from which production becomes profitable, can be calculated analytically. As can be seen from the graph of Fig. 16.3, under a critical program of production, the costs and revenues of the sale of the product of a given enterprise become the same:

Sper • N cr + Spot = D • N cr. (16.4)

From here

(16.5)

Where U is the unit price.

The critical volume of production (breakeven point) can be determined, if necessary, in monetary terms, which is the most acceptable for multi-product production. In this case

Vcr = Co. Per + Spost, (16.6)

Where Вкр - critical volume of production in monetary terms;

Co. Per - the total (aggregate) value of variable costs.

The variable value Co. Per must be presented as a function of the volume of production using the margin profit Km, determined by the formula

(16.7)

Where B is the volume of products produced per year in value terms.

Consequently

Co.per. = B - V • km,

And from here (after further transformations)

Vcr = Spost / km (16.8)

The larger the volume of production in excess of its critical value (break-even point), the greater is the economic safety of production, measured by the corresponding coefficient kb, which is calculated using formula

(16.9)

Where N is the actual (planned) output.

This indicator can also be calculated on the basis of the cost of production ( V ).

A conditional example. The enterprise manufactures and sells products for 200 thousand UAH per year. The cost of its production is 180 thousand UAH., Including variables - 120 thousand UAH., Constant - 60 thousand UAH. Based on this, the indicators: the margin profit ratio, the critical production program, the safety factor of production. They will be:

• Marginal profit ratio

• Critical production program (break-even point)

Vpr = 60 / 0,4 = 150 thousand UAH;

• Safety factor of production

The last indicator (kb) indicates that a 25% decrease in actual production is critical and in this case the enterprise will not have profit (income). Further reduction in production will lead to direct losses.