Definitions of Cost

Definitions of Cost

The cost is the economic expense that represents the manufacture of a product or the provision of a service. By determining the cost of production, the retail price of the good in question can be established (the retail price is the sum of cost plus profit).

According to, the cost of a product is made up of the price of the raw material, the price of direct labor used in its production, the price of indirect labor used to run the business, and the amortization cost of the machinery and buildings.

The economic outlay necessary to manufacture a product or provide a service is called cost.

The costs of a company

Specialists affirm that many entrepreneurs tend to establish their sales prices based on the prices of competitors, without first determining whether they are enough to cover their own costs. For this reason, a large number of businesses do not prosper since they do not obtain the necessary profitability for their operation. This reflects that the calculation of costs is essential for proper business management.

Business cost analysis provides insight into what, where, when, to what extent, how and why it happened, enabling better management of the future.

In other words, the cost is the economic effort that must be made to achieve an operational objective (the payment of salaries, the purchase of materials, the manufacture of a product, the obtaining of funds for financing, the administration of the company, etc.). etc.). When the desired goal is not achieved, a company is said to be losing.

Comparison with the competition

One of the biggest incentives to calculate production costs properly is the growing number of competitors that arise as a natural consequence of globalization. The equation is much more difficult to solve than a purely mathematical vision can offer us: it is not enough to obtain an attractive sale price, but each variable must be thoroughly analyzed to guarantee the company a promising future.

Multiple factors affect the determination of the costs of a company.

As mentioned in a previous paragraph, one of the most common mistakes companies make is to simply beat the prices offered by their competitors. Yes, it is true that such an impulsive and irresponsible strategy can lead to bankruptcy. However, it is also not correct to say that the solution always consists of reducing production costs until the winning price is achieved, because in this way we would be leaving aside consumer expectations: do they really want a lower price?

In some cases, the best decision companies can make is to focus on fine-tuning their messaging so that people can see the benefits of their products and be convinced to choose them over the competition, even if their prices are higher. Needless to say, this strategy is very risky and can also lead to bankruptcy, but if it works the benefits are incalculable.

Difficulties in calculating costs

On the other hand, we must not forget one of the complications that the international distribution of products entails: prices must be calculated taking into account taxes and the stability of the currency of each region, among other determining factors. This arouses complaints from consumers when they learn that in other countries the same item is much more affordable in proportion to the minimum wage and average monthly expenses.

Calculating labor costs is difficult, since factors such as employee fatigue or effort cannot be accounted for objectively; for this there are global parameters that all companies can observe. With regard to materials, you should look for the best offers and seek beneficial contracts to never opt for inferior quality at a better price.


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