📣 Difference between cost and expense

📣 Difference between cost and expense

Costs and expenses are important factors in determining operating profit if two entities have the same income. But one can manage costs and expenses effectively will result in profits that will increase even more. and more beneficial to the holders as well In conditions where the entity is unable to increase operating income or investment income Managing costs and expenses is another way to increase profits. And for the most part, reducing costs and expenses is easier than increasing sales.

The terms cost and cost are words that we often come across. When reading financial statements, but what is the difference between these 2 words? Today I will give you details.

🔸 Costs in the income statement

There are two main items in the income statement: income and expenses. If we chase down the cost component We'll see a list of cost of goods sold (or cost of services) cost of sales. administrative expenses and other expenses

Cost of goods sold is part of the cost itself. The cost of sales is limited to the cost of keeping the product in a ready-to-sell condition. or the cost of providing services as agreed with the customer only

various expenses Incurred afterwards, such as expenses to sell that product, whether it is commission fees, advertising costs or general expenses that the business has to pay to run the business such as water, electricity, rent, employee salaries. It will be classified as selling expenses. or administrative expenses, as the case may be

from time to time for the convenience of communication An accountant may call non-cost expenses, i.e. selling expenses. administrative expenses and other expenses, abbreviated as “expenses”

🔸 Fixed expenses and variable costs

For business owners who need to analyze and manage expenses. may consider the cost from another perspective. The expenses are divided into two types, that is, fixed expenses. and variable costs By categorizing expenses in this view is very important. Because it helps business owners to find the break-even point of the business. and lead to a reasonable price setting

fixed cost is the predetermined cost and must pay with the same amount for the specified period does not vary according to sales, such as rent, employee salaries insurance premium Depreciation, audit fees, bookkeeping costs, interest, etc. Fixed expenses are something that management must control, especially during times of unfavorable business conditions. Because whether the product is sold or not Business owners have to pay for this.

variable costs It is an expense that varies with sales or usage. If you can sell a lot This cost will increase accordingly. On the other hand, if selling less This cost will be reduced accordingly, such as raw material cost, daily labor cost, water cost, factory electricity cost, commission fee. It can be seen that variable costs are expenses that can be reduced. If sales decrease, production decreases, or usage decreases

When we consider costs by combining the two perspectives. Expenses can be divided into four types as follows (hereinafter referred to as non-cost expenses for short as “expenses”).

🔸 Give examples in each category

Fixed costs are machine depreciation. factory rent machine maintenance cost

Variable costs include raw material cost, labor cost of production staff. Packaging costs, water costs, electricity costs in the factory

Fixed expenses include employee salaries, rent, advertising costs, certification fees, audit fees, interest, office depreciation. insurance premium Employee training fees, consulting fees, property taxes

Variable expenses include brokerage fees, water bills, and office electricity costs. Housekeeper and courier daily wages travel expenses Cost of consumables, income tax

Separating costs into four categories helps business owners make informed decisions and adjust to the following situations:

- Crisis situation may start considering cost reduction first because it does not directly affect the quality of the product Savings from variable costs may be easy. and faster, such as water bills, electricity bills in the office by issuing a policy to save electricity during lunch breaks Reduce the number of shifts of housewives and couriers. Reduce overtime approval

For fixed costs, it can also be saved. But there must be a quick adjustment to keep up with the situation, such as considering a contract that can be cancelled. Compounding debts to reduce interest Reduce seminar budget Reduce budget for customer certification Reduce advertising budget, etc.

- Can sell a lot but the profit is less because the gross profit margin is lower than it should be Business owners need to look back at variable costs. To cut costs that do not create value for customers, for example, during the trend of reducing the use of plastic bags. Business owners may reduce packaging costs. and turn to alternative materials that can be recycled. Consumer goods business owner May change the packaging to a big-pack to reduce the use of plastic. and convenient to stock up during quarantine, etc.

- Most fixed costs are items that, when the decision is made, have a long-term effect, such as depreciation of machinery. factory rent machine maintenance cost Therefore, it should be considered separately in order to make the right decision, such as the suitability of the machine. suitability of production capacity the suitability of the machine maintenance plan, etc.

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