All companies can be divided into three business types according to the products of their work. Companies of the first category are service organizations that do not sell any physical products but provide various services to their customers. The second type includes merchandising companies, which can be divided into wholesale and retail businesses. These companies sell finished products that they did not make themselves. Finally, the third type is a manufacturing company that produces goods from raw materials or parts. Every kind of company has different costs to consider and analyze. This paper will explore three business types, namely a service organization, a retail business, and a manufacturing company and define the costs for each type, as well as the ways of monitoring and evaluating these costs.
Manufacturing companies create products and sell them to merchandising companies or directly to customers. The main costs that should be considered for a manufacturing business are the cost of raw materials, the cost of labor and overhead costs. Raw materials are identified by a bill of materials, which lists all of the parts needed to make a finished product, and a routing, which is a list of operations and time required in the process of making goods. The cost of labor is the cost of work conducted by employees. Other indirect costs are covered in overhead, including the cost of necessary equipment, facility management, electricity bills and other expenses (Collier, 2015). Other important costs to account for are the cost of quality and the environmental cost. It is important for a company to track these expenses in order to improve their cost position. For example, by defining every type of cost, the manufacturers will be able to tell which material or equipment is affecting the final price of the product (Christopher, 2016).
Retail businesses and manufacturing companies have some costs in common. For example, some aspects of the overhead costs stay the same, as retail companies still require a facility to sell or distribute goods. The cost of labor is also applicable in retail business, as the organization still relies on the work of employees. It is usually recorded through working hours. The cost of goods sold is a type of expense that covers the results of sold inventory. Various costs connected to the suppliers of the products should also be tracked. Such costs as the delivery failure or quality failure costs are often tracked as overheads (Collier, 2015).
Service organizations provide services, rather than goods. Therefore, these businesses do not track the cost of goods sold. However, there are many direct costs to consider. For example, the cost of labor is still present. There is no inventory in service businesses, as services are perishable and cannot be stored. The costs differ from one type of organization to another. Some service organizations can track the cost of each service provided, while others use the cost of spare capacity by calculating the difference between supplied resources and used recourses (Collier, 2015).
Every business has to account for a variety of costs. To sum up, the cost of labor can be calculated for every type of business, along with some of the overhead costs. Manufacturers and retailers should categorize the costs of materials and equipment, while service organizations can track the cost of spare capacity. Every part of the final cost should be accounted for because a detailed report on each type of expense can help companies determine the best price and compete successfully in the market.
References
Christopher, M. (2016). Logistics & supply chain management (5th ed.). London, UK: Pearson UK.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making (5th ed.). Chichester, UK: John Wiley & Sons.