Cost Analysis: What it is, types, How it is made, Importance and MORE

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The Cost analysis In economics, it refers to a strategy or process that is taken by a company in which the cost is evaluated at the time of carrying out a job or project. This is based on the quality and quantity of the resources that are available.

This is done by different companies to obtain a better knowledge of how much the production cost of any good or service is. If you want to know more about this type of term We invite you to continue reading!

What is Cost Analysis?

The Cost analysis In economics, it is based on a strategy to be able to realize how much is the cost of production of any good or service. This is done by a business or company. To know your production cost.

This is done by economists. Those who are concerned about having the cost that is obtained by obtaining everything necessary to have a cost. This is done to increase the production of said company.

That is, this analysis refers to a strategy or process that is taken by a company. In which the cost is evaluated at the time of carrying out a job or project. To get the best possible profit.

In other words, it can be said that this analysis is to determine how much monetary value can be generated through the inputs. These can be raw material and labor of production. Also, it is known as “General Cost of Production”.

This is because the fixed costs of a production are simpler and easier to identify. This type of analysis is typically performed with greater precision relative to indirect costs. Because it is absolutely necessary to do the measurement using evaluation criteria.

As a summary, it can be said that this type of analysis always has to be related to planning and controlling production. Since in this way it will be possible to know if the objective can be achieved with the best performance and with the best possible profit.

All this type of analysis helps to define and guide any decision making. As long as it is related to the investments and financing of a company or company at the time of costs.

Types of Costs

The cost analysis It is the process of having all kinds of cost to put in having correct planning, decision making and also a cost reduction in benefit to production. The most common types of cost are the following:

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Development and validation of cost forecasts. This is an important time to plan for any cost in a company, business, project or any other idea to generate profit.

Life cycle cost analysis

This type of analysis is considered the total cost calculation. This cost is expected of owning an asset for as long as it has a usable life.

Cost benefit analysis

In this analysis, all the costs and benefits of a production are obtained and compared. For example it may be the cost of developing something compared to the income. Estimates are almost always used, it can be in the payback or investment period.

Cost effectiveness

Cost effectiveness is a process by which the costs of strategies are compared with the data obtained in the results. These results do not only find financial income.

An example of this is when comparing the different drives in which the quality of life can be improved based on cost and non-financial results. One of them can be happiness.

How is a Cost Analysis Prepared?

To be able to do a good Cost analysis, that is to say, it has quality. It is required to apply some control and management methods that are provided as much detail in the spreadsheets. In addition to having a good organization, like any other financial operation in a company.

In order to manage a number of said company in a good and accurate way, it is important to follow the basic rules about analysis and organization. There are different ways to perform this type of analysis efficiently, so each one should be named.

It is important to know all the methods to perform this analysis. Because it is possible to divide all the costs of a company in the following ways: Absorption cost, Direct or variable cost and Activity-based cost (ABC method).

Absorption cost: This is done when variable or fixed costs are not taken into account. All the costs that have to do with the manufacture of said product or the service to be provided are absorbed by this method. With this way, the expenses can be distributed among the other services or products.

Direct or variable costs: With this type of costs, it is important that the direct costs on production that are had at a certain time are considered. With this method for costs, you must clearly separate variable and fixed costs.

Activity-based cost: This cost is also known as the ABC method. It is based on taking into account all the activities that are carried out and the expenses that this generates. Mostly in the allocation of resources for the products that are developed and the services that are provided.

Consider the resources, activities and also the product / service. The activities carried out in the production of the good or service generate costs.

Evaluate what is your company profile and the most appropriate costing method for your business and then apply it. It can vary depending on the segment, the type of production, among other factors, so please evaluate carefully.

What is Cost Analysis Used for?

Cost analysis promotes knowledge of the cost structure involved with a company’s products and services.

When managers are required to collect data to prepare a cost analysis, they will have a deeper understanding of specific elements, such as required work and overhead.

It is used for cost evaluation purposes when there is a lack of competition or comparable offers in the market.

There are several cost concepts relevant to business operations and decisions. To understand them, they can be grouped into two categories:

Cost concepts for accounting purposes

They are used to study the financial position of the company. They are used to organize the finances of the company and to keep track of the assets and liabilities of the company. They are used for tax purposes and to calculate the profit and loss of the company. These are:

  • Opportunity costs.
  • Business costs.
  • Total cost.
  • Explicit costs.
  • Implicit costs.
  • Out-of-pocket cost.
  • Book costs.

Cost concepts for economic analysis

They are used to analyze the possible cost of production in the future. They are based on how the cost of production can be managed, or how the input and output of production can be reorganized to improve the profitability of the company. These costs are:

  • Fixed costs.
  • Variable costs.
  • Total cost.
  • Average costs.
  • Marginal cost.
  • Short-term costs.
  • Long-term costs.
  • Sunk cost.
  • Historical costs.
  • Replacement costs.

Applications

When there is a lack of price competition in the market, a cost analysis is beneficial. Without price competition, it is difficult to determine whether an offer is reasonable. If you want to know an application of this analysis, we invite you to go to this web page.

A cost analysis will help a company evaluate the separate cost elements of a proposal, as well as the proposed benefit, when there are no existing or similar commercial product offerings that can be used for comparison.

Importance of Cost Analysis for Companies

It is considered something important, since a good cost analysis allows the manager to make decisions with more assertiveness, confidence and speed at the time of purchase, and to negotiate more successfully, after all, he has more knowledge of the business.

Every detail makes the difference and the more knowledge have, the better the management. The total value of expenses among providers, the total of the combined expenses of the company with an understandable classification.

The waste of savings, the overlap of purchases and the variation of prices, how the expenses of the company can be compared with the expenses of other companies in the same segment, among other diverse situations.

A quality cost analysis gives the company the possibility of increasing the competitive potential in the market, strengthening itself to face eventual internal or general financial crises, improving productivity, reducing costs and consequently achieving better results.

There are several ways to perform an efficient cost analysis and each company must find the best method for its business. That is why it is essential to invest time in a thorough and correct analysis.

Thank you for reading!

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