In the daily operations of a company, there are a number of financial obligations which the company has to face. These financial obligations can be for various reasons ranging from paying the suppliers of their raw materials, paying their workers, paying for the use of their premises and paying for the directors and managers. The company may also have to use funds when investing in other activities or expanding their usual activities. These funds, or financial obligations of are the company costs (Merriam Webster, 2008).
The nature and composition of the costs of a company will determine whether the company succeeds financially or not. For this reason, company managers usually have to determine the favorable costs that would enable the companies to operate optimally.
The article that I have used is about Morgan Stanley planning to reduce the number of their employees by 2,000. This is due to the reorganization which the company is undergoing from being an investment bank to a financial holding group. The staff in the asset management branch of the company will be reduced by 9%. This reduction in the number of staff is a step towards reducing the costs incurred by the company. These changes have been necessitated by the current global financial crisis which has negatively affected many companies. This has made many other companies to take measures which can cushion them from facing financial losses and the scrutiny of the costs the companies incur is the first place to start.
The costs which are faced by a company can be grouped into different categories. There are variable costs, fixed costs, marginal costs and total costs. Fixed costs usually are not dependent on the level of activity of a company. Even if the level of activity is high or low, these costs will still have to be met and they will be constant. In the case of a company like Morgan Stanley, which is restructuring to be a financial holding group, the fixed costs it usually incurs include the office rental costs. Normally rental fees are fixed for a particular period of time after which, depending on the economic situations, the rent may be increased. For Morgan Stanley, the rent does not increase no matter how many financial transactions it handles or how many clients it serves in its premises.
Variable costs on the other hand are dependent on the level of activity in the company. When the level of activity increases, the variable costs will also increase. For Morgan Stanley, the variable costs in this case can be the cost of remunerating its employees. When the company is handling many demanding clients’ transactions, the company will most likely employ more financial experts to handle these tasks for the clients. The other costs which are variable are the costs of electricity, stationery for the office, telephone costs.
Total costs represent the sum of all the costs incurred by a firm or company. The total costs are dependent on the fixed costs and the variable costs incurred by the company. For example, Morgan Stanley’s monthly total costs will consist of the fixed costs for rent and the other variable costs for electricity, telephone, and the salaries for the financial experts.
Marginal costs (MC) equal the variable costs. The marginal costs show the amounts by which the total costs may increase or decrease in case there is an adjustment in the level of production by a single unit. (Valentino Piana, 2003) When variable costs are zero, the marginal costs will also be nil. If the variable costs change proportionally with the level of activity, the marginal costs will be equivalent to the variable costs incurred (Valentino Piana, 2003). For a company like Morgan Stanley, it would be difficult to determine the marginal costs. This is because variable costs don’t necessarily change proportionally with the level of activity.
References
- Cost. (2008). In Merriam-Webster Online Dictionary. Web.
- Greg Farrell and Chris Hughes. Morgan Stanley to cut 2,000 jobs as it refocuses. Web.
- Valentino Piana, 2003.Economics Web Institute. Costs. Web.