Any organization should consider the two production expenditures: variable and fixed. The first group includes the expenditures related to the number of products it produces (Pettinger, 2019). In other words, the variable expenditures change according to the company’s size and production volume. Variable prices include the purchase of raw materials and materials for components and spare parts for production equipment related to the sale of finished products (for example, transportation and storage). The second type of cost is called fixed. It includes expenditures, which are not dependent on the production’s size. The fixed expenses exist, disregarding the production process (Pettinger, 2019).
Examples of fixed costs are rent and rent, utilities, insurance, specific salaries, and interest payments. The fixed cost is related to time. That is, this value remains constant over time. Variable costs function differently by constantly changing the percentage of profit and loss. It is essential for any commercial enterprise to have a correct division of total costs between fixed and variable.
Another type of cost exists, which is called mixed. This type includes a combination of the two mentioned above cost types. Under fixed expenses, some prices do not change, which is the production growth. At the same time, some details of the cost policy depend on the production process. Any company needs to understand the combination of these various cost elements correctly, as these can predict how costs will change at different activity levels (Pettinger, 2019). An example of mixed costs is delivery costs. On the one hand, the transportation expenses are fixed. However, on the other hand, the fuel expense and the amount of transport required depend on the amount of goods transported or the production volume.
Another vital aspect that should be mentioned in managing the organization’s expenditures is the direct labor and materials costs. It includes the salaries and expenses of workers directly involved in the production process. For example, fast fashion companies have people responsible for the painting and sewing of the products, which makes direct labor. Besides the mentioned costs, direct material expenditures exist. These costs include the materials needed for production, such as raw materials and components.
Another type of expense that the company needs to focus on is the manufacturing overhead and nonmanufacturing costs. The first group includes the factory-related costs during the production process, such as electricity and some of the factory equipment (Javed, 2021). This type of price is vital in the process of forming pricing. There are also nonmanufacturing costs, which include the expenses that are apart from the actual production process (Javed, 2021). For example, the depreciation of the nonmanufacturing equipment can be mentioned as the nonmanufacturing costs.
References
Javed, R. (2021). Manufacturing and non-manufacturing costs. Accounting for Management. Web.
Pettinger, T. (2019). Types of costs. Economics Help. Web.