The accounting concepts of “costs” and “expenses”: so similar, but very different. How expenses differ from expenses The process of expenses is called simple expenses

Cost concept

In the economic literature you can find such concepts as costs, costs, expenses. At their core, all these concepts mean the same thing - the costs of an enterprise associated with performing certain operations.

The term "costs" is used, as a rule, in economic theory. These are the total sacrifices of the enterprise associated with the performance of certain operations. They include both explicit (accounting, settlement) and implied (alternative) costs.

Explicit (calculated) costs are actual costs expressed in monetary terms, caused by the acquisition and expenditure of various types of economic resources in the process of production and circulation of products, goods or services.

Alternative (opportunity) costs mean the lost profit of an enterprise that it would have received if it had chosen to produce an alternative product, at an alternative price, on an alternative market, etc.

Costs should be understood as the explicit (actual, estimated) costs of an enterprise, and expenses should be understood as a decrease in the enterprise’s funds or an increase in its debt obligations in the process of economic activity. Expenses mean the fact of using raw materials, supplies, and services. Only at the moment of sale does the enterprise recognize its income and the associated part of the costs - expenses.

We are guided by this understanding of the above terms by standard 18 IFRS “Revenue”, as well as domestic PBU 9/99 “Income of the organization” and 10/99 “Expenses of the organization”. According to these documents, expenses typically take the form of an outflow or reduction of an asset. Expenses are recognized in the income statement based on the direct relationship between the costs incurred and the revenues from certain items of income. This approach is called matching expenses and income. Based on this, in accounting, all income must be correlated with the costs of obtaining them, called expenses. From the point of view of accounting technology, this means that costs should be accumulated in the accounts “Materials”, “Depreciation”, “Payroll calculations”, etc., then in the accounts “Main production”, “Finished products” and not be written off to sales accounts until the products, goods, services with which they are associated are sold, since only at the time of sale will the organization recognize its expenses.

Cost classification

Costs are not the same not only in their composition, but also in their significance in the manufacture of a product, the performance of work and services. Therefore, for the effective organization of management accounting, it is necessary to apply an economically sound classification of costs according to certain criteria. This will help not only to better plan and take into account costs, but also to analyze them more accurately, as well as identify certain relationships between individual types of costs and calculate the degree of their influence on the level of cost and profitability of production.

In management accounting, the purpose of any cost classification should be to assist the manager in making correct, rationally based decisions, since the manager, when making decisions, must know what costs and benefits they will entail. Therefore, the essence of the cost classification process is to highlight that part of the costs that the manager can influence.

The practice of organizing management accounting in economically developed countries provides for different options for classifying costs depending on the target setting and areas of cost accounting. Consumers of internal information determine the direction of accounting that they require to provide information on the problem under study.

In general, the classification of costs can be presented in the following form (Table 1).

Table 1

Classification of costs by cost management functions

Cost Management Features	Classification characteristics and groups
1.Making management decisions	Explicit and alternative; relevant and irrelevant; effective and ineffective
2. Forecasting	Short term and long term
3. Planning	Planned and unplanned
4. Rationing	Standards, norms and regulations and deviations from them
5. Organization	By places and areas of origin; activity functions and cost centers
	Single-element and complex; by costing items and economic elements; constants and variables; main and invoices; direct and indirect; current and one-time
7. Control	Controlled and uncontrolled
8. Regulation	Adjustable and non-adjustable
9. Stimulation	Mandatory and incentive
10. Analysis	Actual; forecast, planning; estimates; standard; general and structural; full and partial

Explicit costs are the expected costs that an enterprise must bear in carrying out its production and business activities.

The costs caused by the refusal of one product in favor of another are called alternative (imputed) costs. They represent lost profits when choosing one action precludes the occurrence of another action. Opportunity costs arise when resources are limited. If resources are unlimited, opportunity costs are zero. Opportunity costs are sometimes called incremental costs.

Depending on the specifics of the decisions made, it is advisable to divide costs into relevant and irrelevant. Relevant(i.e., significant, significant) costs can only be considered those costs that depend on the management decision in question. In particular, past costs cannot be relevant because they can no longer be influenced. At the same time, opportunity costs (lost profits) are relevant for making management decisions.

The results of decisions made can be significantly influenced by dividing costs into effective and ineffective.

Effective costs- these are productive costs, as a result of which income is received from the sale of those types of products for the production of which these costs were incurred. Ineffective costs-- these are costs of an unproductive nature, as a result of which no income will be received, since the product will not be produced. Ineffective costs are losses in production. These include losses from defects, downtime, shortages and damage to inventory items, etc. The identification of ineffective costs is mandatory, since it allows us to prevent losses from penetrating into planning and rationing.

Any enterprise seeking to maximize its profits must organize production in such a way that the cost per unit of output is minimal. This means that the decisions made should be focused on the task of minimizing costs. In fulfilling this task, forecasting plays an important role, during which the costs of an enterprise are considered in the short and long term. This need is due to the fact that the short-term and long-term periods differ in the opportunities that arise for the organization. So:

1) in the short term the organization cannot change its production capacity, and in long term such a possibility exists;

2) in short term there is no possibility of free access of new firms to the industry and the market, i.e. the number of functioning economic units does not change. IN long term such a possibility arises;

3) in short term fixed and variable costs can be distinguished. IN long term In the same period, all costs become variable due to changes in the scale base.

Adopted management decisions cannot be implemented if they do not have direct connections with planning, during which the expected costs associated with the implementation of production and commercial activities are considered from the point of view of the possibilities of their coverage by the plan. For these purposes, the organization’s costs must be divided into planned and unplanned.

TO planned costs include productive expenses of the enterprise, caused by its economic activities and provided for by the production cost estimate. In accordance with norms, regulations, limits and estimates, they are included in the planned cost of production.

Unplanned costs- these are unproductive expenses that are not inevitable and do not arise from the normal conditions of the economic activity of the enterprise. These costs are considered direct losses and therefore are not included in the production cost estimate. They are reflected only in the actual cost of marketable products and in the corresponding accounts in accounting. These include losses from defects, downtime, etc. Their separate accounting facilitates the implementation of measures aimed at their prevention.

Of great importance is the classification of costs depending on their relationship to those existing in the enterprise norms, regulations, limits and standards. According to this criterion, all costs included in the cost of production are grouped according to established standards, valid at the beginning of the current month, and according to deviations from current standards arising during the production process. This division of costs underlies regulatory accounting and is the most important means of current operational control over the level of production costs.

It is impossible to manage an enterprise without its clear organization. It forms the basis of daily management activities, and without it, neither plans nor programs usually work.

It is also advisable to group and take into account costs by production, workshops, sections, departments, teams and other structural divisions of the enterprise, i.e. By centers of their origin. This grouping of costs allows you to organize internal cost accounting and determine the production cost of products. This grouping of costs directly depends on the organizational structure of the enterprise.

Closely related to the above classification of costs is the grouping of costs depending on the areas and functions of the enterprise. Based on this feature, costs can be divided into supply and procurement, production, sales and organizational and management.

This grouping of costs makes it possible to organize functional accounting, in which costs are first collected in the context of the areas and functions of the enterprise, and only then - by costing objects.

Functional cost accounting helps to strengthen intra-business accounting and strengthen the relationship and interdependence between cost centers, and ensures the provision of more accurate information about costs incurred. This helps managers make joint informed decisions about the type, composition, price, ways of selling products and helps improve the efficiency of the enterprise’s production and commercial activities.

All measures taken to implement management activities can be nullified if the enterprise does not have an effective accounting system. This area bears the main responsibility for information support for the processes of making and implementing the necessary management decisions. To implement accounting procedures, enterprise costs are grouped by composition, economic content, role in the technological process of manufacturing products, relation to production volume, method and time of inclusion in the cost of production, etc.

Based on their composition, costs are divided into single-element and complex.

Single element are called costs consisting of one element - materials, wages, depreciation, etc. These costs, regardless of their place of origin and intended purpose, are not divided into various components.

Comprehensive are called costs consisting of several elements, for example, general production and general business expenses, which include wages of the relevant personnel, depreciation of buildings and other single-element costs.

According to economic content, costs are classified according to economic elements and costing items.

Economic element It is customary to call the primary homogeneous type of costs for the production and sale of products, which at the enterprise level cannot be decomposed into its component parts.

The regulation on the composition of costs included in the cost of production establishes a uniform list of cost elements for all enterprises, including:

· material costs;

· labor costs;

· contributions for social needs;

· depreciation;

· other costs.

Calculation item It is customary to call a certain type of cost that forms the cost of both individual types and all products as a whole.

However, the classification of costs by economic elements does not allow calculating the cost of individual types of products or establishing the amount of costs of specific structural divisions of the enterprise.

To solve these problems, a classification of costs is used costing items. It allows you to determine the purpose of expenses and their role, organize control over them, identify qualitative indicators of economic activity of both the enterprise as a whole and its individual divisions, and establish in which areas it is necessary to search for ways to reduce production costs. On the basis of this grouping, analytical accounting of production costs is built, and planned and actual cost calculations of individual types of products are compiled.

In commercial organizations, this grouping of costs is the main one, but its content is differentiated based on the specifics of each industry.

Of particular importance for management accounting is the method of including costs in the cost of production. Based on this criterion, enterprise costs are divided into direct and indirect.

Direct are the costs of producing a specific type of product. Therefore, they can be attributed to calculation objects at the time of their commission or accrual directly on the basis of data from primary documents. These include the costs of raw materials, materials, wages of production workers, etc.

Indirect costs associated with the production of several types of products, for example, costs of management and maintenance of production.

Indirect costs are first collected on the appropriate collection and distribution accounts, and then included in the cost of specific products using special distribution calculations. The choice of distribution base is determined by the characteristics of the organization and production technology and is established by industry instructions for planning, accounting and calculating product costs.

The division of costs into direct and indirect is conditional. So, in mining industries, where, as a rule, one type of product is extracted, there are direct costs. In complex industries, in which several types of products are made from the same types of raw materials, the main costs are indirect. Expanding the share of direct costs contributes to a more accurate determination of product costs.

Cost grouping is important in choosing an accounting and costing system in relation to production volume. Based on this criterion, costs are divided into fixed and variable.

Variables are called costs, the value of which changes with changes in production volume. These include the consumption of raw materials, fuel and energy for technological purposes, wages of production workers, etc.

TO permanent include costs, the value of which does not change or changes slightly with changes in production volume. These include general business expenses, etc.

Some costs are called mixed, since they have both variable and constant components. They are sometimes called semi-variables And semi-permanent costs. All direct costs are variable costs, and general production, general and commercial expenses contain both variable and fixed cost components. For example, a monthly telephone fee includes a constant amount of the subscription fee and a variable part, which depends on the number and duration of long-distance and international telephone calls. Therefore, when accounting for costs, they must be clearly distinguished between fixed and variable costs.

Of no small importance in management accounting is also the grouping of costs based on their role in the technological process of manufacturing products and their intended purpose. According to this criterion, the costs of the enterprise are divided into basic and overhead.

Main are costs directly related to the technological process of manufacturing products. These include: the cost of raw materials, materials and semi-finished products that are materially included in the product; the cost of fuel and energy spent for technological purposes; expenses for remuneration of production workers and contributions for social needs; operating costs of production machines and equipment, etc.

Invoices expenses arise in connection with the organization, maintenance of production, sales of products and management. They consist of administrative and commercial expenses. The amount of these expenses depends on the management structure of the organization, the business policy of the administration and other factors.

This division of costs is based on the fact that the cost of production should include only production costs. They, as necessary, form the production cost of the product and are used to calculate the cost per unit of production. Periodic expenses are mainly associated with ensuring the process of selling products and the functioning of the enterprise as an economic unit, and therefore are written off as a decrease in profit from sales of products.

Such a grouping of costs is still rare in domestic accounting practice. Meanwhile, it has long been widely used in countries with developed market economies that use the direct costing accounting system. In this case, the resulting accounting information more adequately reflects the process of market pricing and allows for a comprehensive analysis and planning of the relationship between production volumes, prices and production costs.

An important role is played by the grouping of costs depending on the time of their occurrence and attribution to the cost of production. According to this criterion, costs are divided into current, future reporting period and upcoming. TO current include expenses for the production and sale of products for a given period. They have generated income in the present and have lost the ability to generate income in the future. Future expenses-- these are costs incurred in the current reporting period, but subject to inclusion in the cost of products that will be produced in subsequent reporting periods (for example, costs for the development of commissioned workshops, production facilities, for the preparation and development of new types of products in existing enterprises). Such expenses should generate income in the future. Forthcoming includes costs that have not yet been incurred in a given reporting period, but in order to correctly reflect the actual cost, they are subject to inclusion in the production costs for a given reporting period in a planned amount (expenses for paying workers' vacations, paying a one-time remuneration for long service and other costs that have periodic nature).

According to the control system, which ensures the completeness and correctness of actions in the future aimed at reducing costs and increasing production efficiency; costs are divided into controllable and uncontrollable.

Controlled- these are costs that can be controlled by the subjects of management. Uncontrollable e same costs do not depend on the activities of management subjects. For example, revaluation of fixed assets, which entailed an increase in depreciation amounts, changes in prices for fuel and energy resources, etc.

In order for the cost control system at an enterprise to be effective, it is necessary to first identify the centers of responsibility where costs are generated, classify costs, and then use a cost management accounting system. As a result, the head of the enterprise will have the opportunity to timely identify bottlenecks in planning, formation of costs and make appropriate management decisions.

The process of cost management in an enterprise includes the process regulation their level. For these purposes, costs are divided into regulated and unregulated.

By degree adjustability costs are divided into fully, partially and weakly regulated.

Fully adjustable costs arise primarily in the areas of production and distribution. These are costs recorded by responsibility centers and their value depends on the degree of regulation on the part of the manager. Partially adjustable costs occur primarily in R&D (research and development), marketing and customer service. Weak adjustable (given) costs arise in all functional areas. The division of costs into regulated and unregulated must be provided for in reports on the execution of estimates by responsibility centers. This will allow us to highlight the area of ​​responsibility of each manager and evaluate his work in terms of controlling the costs of the enterprise department.

A modern enterprise management system is not considered effective if it does not put the “human factor” first. The success of any production and commercial activity primarily depends on the efforts of the workforce, the professionalism of management subjects, and their interest in the results of their work. For this purpose, an incentive system is widely used in management activities. Based on this characteristic, the enterprise’s costs are divided into mandatory related to the performance of basic job duties, and incentives aimed at achieving high quality indicators.

The process of making management decisions is impossible without an effective system of economic analysis that allows one to evaluate the achieved results of an enterprise’s activities and identify internal and external reserves for its further development. For these purposes, costs are grouped into actual, forecast, planned, estimated, etc. During the analysis, both the total volume of costs and the individual elements and items that form it are examined, i.e. structure.

The application of this classification of costs in the context of management functions will improve the efficiency of management accounting, enhance its analytical nature and the ability to identify reserves for increasing the effectiveness of production and commercial activities.

In accounting, in addition to impeccable knowledge of accounts and postings, it is important to correctly use special terms. This is a sign of professional literacy. But there are situations when accounting luminaries get confused in terms. The Russian language is very rich! In many foreign languages, one word has different connotations depending on the context. But it’s not that simple for us. The concept of costs and expenses is one such complex case. At first glance, it seems that these are synonyms. Is it really? Or do these two categories have fundamental differences? Let's figure it out.

Costs as they are

Costs are the resources used for the production and marketing of products in monetary terms. In this case, resources can be natural (water, gas, electricity...), material (raw materials, semi-finished products, fuel, building materials, spare parts...), labor (living and material labor) and financial. That is, any payments to a company for the use of economic resources can be considered costs.

Main cost features:

• Always associated with the acquisition, processing and storage of resources. Costs show what was used and how much;
• Must be expressed in units of value. This is how different resources become comparable and can be summed up (how else can kilograms be combined with kilowatts and man-hours?);
• Always tied to specific goals (for the production of goods, works, services; for servicing a structural unit). Costs are usually compared with the results of production activities;
• They are considered assets of the enterprise. If costs are not completely written off for a specific product (work, service), then they turn into inventories. This is how production inventories, work in progress and finished products in the warehouse are formed;
• Relate to a specific time (reporting) period (month, quarter, year).

Costs arise when one asset is exchanged for another of equal value: one increases and the other decreases by the same amount. As an exception, payroll is considered. In this case, one asset will increase due to a simultaneous and equal increase in the liability to employees. But costs never affect your own capital.

Remember! Costs are recorded in accounting at the time of production consumption. They do not form a financial result, but only accumulate, which is called calculation. Only in the future will they be transformed into the actual cost of products (services, works). They do not reduce the capital of the enterprise.

Classification of costs by degree of occurrence

There are many areas of cost classification. But we will focus on those that most characterize the essence of the concept.

According to the degree of occurrence and attribution to the production result, costs are:

• Capitalized - initial receipt and reflection in the balance of resources (inventory, goods, fixed assets);
• Recapitalized – re-reflection of previously acquired resources in the balance sheet; formation of a new group of assets using previously displayed resources (work in progress, finished goods);
• Decapitalized - a decrease in financial results due to unproductive use of resources (damage, loss);
• Current – ​​administrative and sales (commercial) costs.

Costs as they are

Expenses (according to PBU 10/99) are when economic benefits decrease due to the disposal of cash or other assets and (or) liabilities arise, which entails a decrease in the company’s capital, in addition to a decrease in contributions by decision of the founders (owners).

Expenses (according to the Tax Code of the Russian Federation, Chapter 25) are justified (i.e., economically justified and having a monetary value) and documented (directly or indirectly) expenses. It turns out that tax legislation considers expenses as a special case of expenses.

Costs in accounting become expenses when:

• No asset formation;
• Existing current assets were written off for non-productive needs;
• Non-current assets are written off for any reason.

Due to the principle of matching expenses and income, expenses in a particular accounting period are always associated with both production and sales. It is at the moment of product sales that three key indicators are recognized:

• Income (through selling price);
• Expenses (through cost);
• Profit/loss (“Income” minus “Expenses”).

Expense accounting begins at certain events. For example:

• Shipment of products – finished products (asset) are disposed of at cost, which is less than the selling price. That is, the resulting receivables will be greater than the value of the disposed asset;
• Recognition of fines - liabilities increase, but no assets are added to the balance sheet;
• Write-off of bad accounts receivable - assets are reduced, but liabilities are not reduced. A loss occurs - a decrease in equity capital;
• Recognition of a negative exchange rate difference - liabilities will increase without any increase in assets.

Remember! Any expenses incurred to generate income can be considered expenses. Expenses in accounting are reflected at the time of payment, while payment is considered both an actual purchase and an installment purchase (settlement with a bill instead of cash or by generating ordinary accounts payable). They form the financial result and are therefore reflected in the corresponding financial report.

Classification of expenses by type of activity

The organization's expenses are distinguished by type of activity:

• Ordinary are expenses associated with the main, financial, investment and other statutory activities of the enterprise;
• Emergency expenses are expenses associated with force majeure situations due to the influence of an irresistible natural force (natural disasters) or provoked by the activities/inactivity of people (fire, war, man-made accident).

Accounting for emergency expenses is carried out in the following areas:

• Elimination of consequences (if the harm is reparable);
• Loss of assets (if the harm is irreparable);
• Other losses caused by production stoppages.

How do costs and expenses relate to each other?

There are three possible situations of correlation between the two categories:

• Costs ˂ Expenses– funds have been spent, but the asset has not been used for production consumption. The funds spent can be considered as future expenses, especially when it comes to the development of new production or advance payments for renting premises;
• Costs = Expenses– the funds are spent and the acquired asset is fully used during the production and sale of products. Both production and full costs have been generated. This is an ideal match that simplifies accounting;
• Costs > Expenses– an asset held in inventory or reserve is used in production and is included in the cost. Or workers' wages were accrued for the previous period. But there was no sale of products.

Be careful! In some regulations (for example, PBU 18/02) there is a confusion of terms. The difference in interpretations in tax and financial accounting creates difficulties in distinguishing between costs and expenses. Pay attention to what exactly you are taking into account and for what purpose.

The concept of “costs” is capacious (extensive) - it characterizes the totality of all material, labor and financial resources, the consumption of which is aimed at carrying out the production and financial activities of the organization. Costs are a decrease in assets (cash or other property) or an increase in liabilities (debt) associated with the occurrence of costs.

Costs arise when resources are acquired as a result of:

Payments of money;

Purchases on credit;

Commodity exchange operations.

The organization's costs can be divided:

For costs written off directly to the expenses of the reporting period (production costs);

Active-forming costs.

Production costs are divided into direct, that is, directly related to the production of a given specific type of product (work, service), and indirect (overhead), not directly related to a specific product, but due to the process of organizing, servicing and managing production.

Costs for organizing production and management are not capitalized into assets, but are written off as expenses of the reporting period.

Asset-forming costs are costs that provide benefits in the future, the cost of which is capitalized into assets presented in the form of real objects (rights, depreciable property, etc.).

Often the concept of “costs” is identified with the concept of “expenses”, but these phenomena have fundamental differences and cannot be synonymous.

The concept of “expenses” is enshrined in PBU 10/99 “Expenses of an organization”, approved by Order of the Ministry of Finance of Russia dated May 6, 1999 N 33n. Expenses of an organization are recognized as a decrease in economic benefits as a result of the disposal of assets (cash, other property) and (or) the emergence of liabilities, leading to a decrease in the capital of this organization, with the exception of a decrease in contributions by decision of participants (owners of property).

Expenses represent an outflow of economic benefits during an accounting period in the form of a decrease or use of an entity's assets or an increase in its liabilities, resulting in a decrease in capital, other than a distribution of capital among the entity's participants.

Expenses of the current reporting period resulting from income received in this reporting period cannot be recognized in this income statement until the income is recognized. This approach is called matching expenses and income.

According to accounting regulations, costs in the period in which they are incurred may coincide with expenses if one of the following conditions is met:

Income was received as a result of their (expenses) implementation;

There is a reasonable degree of confidence in the absence of income both in the current reporting period and in future reporting periods.

The totality of costs not recognized as expenses at the end of the reporting period is recognized not in the income statement, but in the balance sheet as an asset (cost-to-expense rule).

In general, the valuation of consumed resources continues to be included in expenses until the moment of recognition of the income for the extraction of which the consumption of these resources was aimed. When revenue is recognized, costs are recognized as expenses.

When studying costs in management accounting and, therefore, when managing costs, various aspects of them are taken into account. For the purpose of effective cost management, their classification is used, which involves grouping according to certain characteristics. Detailed information on costs is organized by the insurer independently in accordance with management and reporting purposes. Since the activities of an insurance organization are associated with various types of costs, one cannot limit oneself to a single unambiguous classification. The table shows the most commonly used criteria for classifying expenses when studying them in the management of insurance organizations.

In accordance with the requirements of PBU 10/99 for the preparation of financial statements of insurance organizations, when generating expenses for ordinary activities, they are classified according to cost elements. The nomenclature of cost elements is the same for all types of activities, regardless of industry specifics. In order to manage the rational consumption of an organization's resources, the classification of costs by element allows one to determine and analyze the structure of current expenses, their share in the total amount of costs and the dynamics of change.

When classifying expenses by time of occurrence, expenses associated with insurance payments and settlement of losses under insurance contracts are of particular importance. Data on insurance payments by type of insurance for past periods provide a statistical basis for calculating the price of insurance services in terms of net premiums and calculating the amount of insurance reserves. Another element of the price of an insurance service - the load - is determined on the basis of accounting data on the costs of running a business.

Insurance payments and claims settlement expenses are also the main items of direct costs. Direct costs are directly related to the insurance production of specific products and, at the time of their occurrence, are subject to reflection in primary accounting documents, therefore they are characterized as inventoryable.

The costs of conducting a business have a multi-element composition, including complex items:

Costs of conducting insurance operations (costs of concluding, maintaining and executing insurance contracts, co-insurance and reinsurance);

Administrative, management and general business expenses;

Other expenses.

The composition of the costs of running an insurer's business is presented in the table.

The costs of conducting insurance operations, the composition of which is given in column 1 of the table, are considered direct costs and during the reporting period (month) on the basis of primary documents are taken into account for specific types of insurance and insurance contracts, that is, they also belong to inventory. An exception may be labor costs and depreciation charges. Their assignment to a specific type can be carried out using a calculation method, including those enshrined in the accounting policy.

Administrative, general and other expenses are classified as indirect expenses. Such expenses are usually determined on the basis of a pre-compiled general estimate and are allocated by calculation to specific types and contracts of insurance. Direct costs, the amount of gross insurance premiums collected, etc. can be used as a basic indicator for the distribution of indirect costs. It should be noted that the level of costs included in the cost of the insurance product, and, consequently, the price, depends on the selected basic indicator for the distribution of indirect costs.

In management accounting, indirect (indirect) costs are characterized as non-inventoriable due to the complexity of their control and accounting due to:

A multi-element composition of indirect costs, including complex cost items and representing a set of different economic contents and the nature of changes in costs;

Possible discrepancies between the time of indirect costs and the time of production and sales of products;

Unevenness of their occurrence during the reporting period.

Indirect costs are more difficult to control, since they are multi-element, complex cost items and represent a set of costs that are different in their economic content, in the nature of change and uniformity of distribution during the reporting period. For example, types of expenses such as depreciation, taxes, fees do not depend on the level of business activity of the enterprise; Heating costs only arise in winter. However, in accounting practice, indirect costs are reflected evenly, otherwise the same products will account for a large share of indirect costs in winter periods, and a smaller share in summer periods, which is inappropriate.

The peculiarity of indirect costs follows from their economic essence as an element of production costs and consists in the impossibility of accurately assessing them during the production of a product, since it is impossible to trace the path of a specific element of indirect costs in the process of managing an organization. While direct costs directly arise in connection with the production of a product, not all indirect costs are incurred simultaneously with the process of producing and selling products. Some of them occur at periods much earlier than the implementation of the production process itself. Other indirect costs occur at a much later time - during the period when the process has already been completed. Indirect costs can occur even if there are no direct costs. Thus, indirect costs in terms of implementation time do not coincide with the time of production and sale of products.

The main problems of distribution of indirect costs include:

Justification and choice of method for distributing indirect costs (at a single distribution rate, differentiated approach);

Selecting a basic indicator for the distribution of indirect costs;

Accuracy of determining the value of the basic indicator for the distribution of overhead costs.

The current trend in terms of changes in costs in the production and sale of an organization's products is that the share of indirect costs is constantly increasing in the total amount of costs compared to direct costs. And this is a general trend for any type of business. The ever-increasing share of indirect costs requires increased attention to the validity of their distribution between individual objects.

It is obvious that it is impossible to find any universal indicator that for all indirect costs would be the only carrier of costs, that is, that factor or indicator, the change of which to a decisive extent affects the change in the amount of indirect costs. The choice of one cost carrier for all indirect costs leads to a significant distortion of the cost value of certain types of insurance products. At the same time, the amount of indirect costs attributable to certain products, and, accordingly, their cost, changes significantly in some cases, depending on the cost carrier used. Finally, one or another insurance product, profitable when using any one cost carrier, may turn out to be unprofitable when using a different method of distributing indirect costs.

Problems of assessment, control and distribution of indirect costs between individual contracts and types of insurance, divisions are associated both with the problems of transfer (intra-company) pricing and with setting the price of insurance services as a whole. Transfer pricing is a mechanism for redistributing income between members of an organization and assessing their contributions to the overall result of operations. The validity of the distribution of indirect costs affects the reasonable determination of the organization’s profits.

Modern management accounting considers other, different from traditional, methods of distributing indirect costs and forming the full cost. Among such methods is the ABC-costing (functional cost accounting) method of distributing indirect costs, based on the fact that products are not the cause of costs, but the cause is the operations and actions that result in costs. A distinctive feature of the ABC-costing method is that individual types of activities (marketing, information and technical services, HR services, etc.) are considered as cost accounting objects, the cost of which is used as the basis for assigning costs to costing objects - products.

The transfer price expresses the relationship not only between departments or centers of responsibility, but also between each department and the enterprise as a whole. It is necessary to establish as accurately as possible the share of constant general production and general expenses that is directly related to the management of this division and must be reimbursed by its costs in order to ensure conflict-free and effective interaction.

An effective tool for planning the volume of insurance operations and the insurance portfolio, and controlling costs in the practice of foreign insurance companies is limit analysis, based on the classification of costs into variable and fixed. Variable costs are those that change when the level of business activity of the insurer changes, that is, changes in the volume of insurance premiums and the number of insurance contracts. Variable costs in insurance include insurance payments, claims settlement expenses, commissions to intermediaries (insurance agents, brokers), and costs of conducting insurance operations.

Fixed expenses do not change as business activity changes. These include expenses for renting retail premises (representative offices, agencies, branches), remuneration of staff personnel not directly related to insurance operations, administrative and management expenses, etc. Fixed expenses in management accounting are considered as period expenses (periodic). Expenses of the period are related to the month, quarter, year during which they occurred. When using modern methods of costing in management accounting ("direct-cost", "standard-cost"), indirect costs are not attributed to the objects of calculation (order, process), but are written off to the cost of sales.

The considered options for classifying costs and characterizing their various aspects certainly increase the degree of knowledge of a given management accounting object, which, in turn, increases the degree of controllability of the object.

Clarifying definitions of concepts

To the above definition, more clarifying and delimiting definitions of concepts can be added. According to the continental definition of the movement of value flows at different levels of liquidity and between different levels of liquidity, the following distinction can be made between the concepts of negative and positive value flows of organizations:

In economics, four basic levels of value flows can be identified with respect to liquidity (pictured from bottom to top):

1. Available capital level(cash, highly liquid funds (checks), operational bank accounts)

payments And payments

2. Level of money capital(1. Level + accounts receivable - accounts payable)

Movement at this level is determined costs and (financial) revenues

3. Level of production capital(2. Level + production required subject capital (tangible and intangible (for example, patent)))

Movement at this level is determined costs And production income

4. Net capital level(3. Level + other subject capital (tangible and intangible (for example, accounting program)))

Movement at this level is determined expenses And income

Instead of the level of net capital, you can use the concept level of total capital, if we take into account other non-material capital (for example, the company’s image..)

The movement of values ​​between levels is theoretically carried out at all levels at once. But practice often lives by exceptions, when only a few levels are covered, and not all. They are indicated in the image by numbers.

I. Exceptions to the movement of value flows of levels 1 and 2 are due to credit transactions (financial delays):

4) payments, not costs: repayment of credit debt (="partial" loan repayment (NAMI))

1) costs, non-payment: the appearance of credit debt (=the appearance (of US) of a debt to other participants)

6) payment, non-receipt: entry of accounts receivable (="partial" repayment of debt by other participants for a product/service sold (by US))

2) receipts, non-payment: appearance of receivables (= provision (by OUR) of installment plans to pay for the product/service to other participants)

II. Exceptions to the movement of value flows of levels 2 and 4 are due to warehouse operations (material delays):

10) costs, not expenses: payment for credited materials that are still in the warehouse (= payment (US) by debit regarding “stale” materials or products)

3) expenses, not costs: delivery of still unpaid materials from the warehouse (to (OUR) production)

11) receipts, not income: pre-payment for the subsequent delivery of ((OUR) “future” product by other participants)

5) income, non-receipts: launch of an independently produced installation (="indirect" future receipts will create an influx of value for this installation)

III. Exceptions in the movement of value flows of levels 3 and 4 are due to the asynchrony between the intra-periodic and inter-periodic production (main) activities of the enterprise and the difference between the main and related activities of the enterprise:

7) expenses, not expenses: neutral expenses (= expenses of other periods, non-production expenses and unusually high expenses)

9) costs, not expenses: calculator costs (= write-offs, interest on equity capital, leasing of the company’s own real estate, owner’s salary and risks)

8) income, non-production income: neutral income (= income from other periods, non-production income and unusually high income)

It was not possible to detect production income that was not income.

Financial balance

The foundation of financial balance Any organization can be simplified into the following three postulates:

1. In the short term: superiority (or compliance) of payments over disbursements.
2. In the medium term: superiority (or compliance) of revenues over costs.
3. In the long term: the superiority (or matching) of income over expenses.

Costs are the “core” of expenses (the main negative value flow of an organization). Production (core) income can be classified as the “core” of income (the main positive value flow of an organization), based on the concept of specialization (division of labor) of organizations in one or more types of activities in society or the economy.

Types of costs

• Third-party company services
• Other

A more detailed structuring of costs is also possible.

Types of costs

• By impact on the cost of the final product
• In relation to production capacity utilization
• In relation to the production process
  • Production costs
  • Non-production costs
• Constant over time
  • time-fixed costs
  • episodic costs
• By type of cost accounting
  • accounting costs
  • calculator costs
• By divisional proximity to manufactured products
  • overhead costs
  • general business expenses
• By importance to product groups
  • group A costs
  • group B costs
• By importance to manufactured products
  • product 1 costs
  • product costs 2

• By importance for decision making
  • relevant costs
  • irrelevant costs
• By removability
  • avoidable costs
  • sunk costs
• By adjustability
  • adjustable
  • unregulated costs
• Refund possible
  • return costs
  • sunk costs
• By cost behavior
  • incremental costs
  • marginal (marginal) costs
• Cost to quality ratio
  • corrective action costs
  • costs of preventive actions

see also

Literature

• Kistner K.-P., Steven M.: Betriebswirtschaftlehre im Grundstudium II, Physica-Verlag Heidelberg, 1997

Wikimedia Foundation. 2010.

Synonyms:

Antonyms:

• Agharti
• Recruit (film)

See what “Costs” are in other dictionaries:

expenses- Expressed in monetary terms, the amount of resources used for specific purposes. According to the nature of participation in the production process, bills are divided into main and invoices: the main ones are directly related to production (can be direct and... ...

expenses- paid off existence / creation, subject, interruption, decision, compensation compensate for costs existence / creation, interruption, decision, compensation minimize costs change, little reduce costs change, little... ... Verbal compatibility of non-objective names

EXPENSES- (absorption) Total expenditures on real goods and services; consumption costs, investment and government spending. Absorption refers to the consumption of products; When estimating absorption, imports are taken into account but exports are excluded. This is what it is... ... Economic dictionary

expenses- exhaustion, expenses, expenses, protori, spending, expenses, capital investments, spending, labor costs, energy costs Dictionary of Russian synonyms. expenses, expenses, expenses; Protori (obsolete) Dictionary of synonyms of the Russian language. Practical... ... Synonym dictionary

Expenses- a concept widely used in economic literature, which, however, does not have a generally accepted definition. In its most general form, these are resources that are “destroyed” in the process of production (understood in... ... Economic-mathematical dictionary

Expenses- in the balance sheet any expenses incurred during the reporting period. See also: Enterprise costs Balance sheets Financial dictionary Finam ... Financial Dictionary

Expenses- (inputs) Factors of production (land, labor, capital, entrepreneurial ability), which are needed so that the organization can produce goods or services. Business. Dictionary. M.: INFRA M,… … Dictionary of business terms

costs (millions)- costs (millions) expenses (millions) - [A.S. Goldberg. English-Russian energy dictionary. 2006] Topics energy in general Synonyms costs (millions) expenses (millions) EN cost ... Technical Translator's Guide

expenses- All objectively necessary investments (expenses) of embodied and living labor, together with losses arising as a result of imperfect organization of labor, production, transportation of products, etc. (at the enterprise level this is the cost... ... Dictionary of Geography

Expenses- 1.5.4. The costs of performing work on driving piles made of rolled steel (I-beams, channels) should be determined according to the prices for performing work on driving steel sheet piles of the corresponding weight. Source … Dictionary-reference book of terms of normative and technical documentation

Books

• Methodology for determining estimated prices for labor costs in construction (2329). This Methodology for determining estimated prices for labor costs in construction was developed in accordance with Part 6 of Article 83 of the Town Planning Code of the Russian Federation and the Procedure... Category: Construction Publisher:

The quality of distribution of indirect costs directly affects the adequacy of management decisions. In the event that such costs are not allocated, the achievements of a particular division or product will be overestimated. But the total distribution of absolutely all costs will most likely also lead to distortion of financial results. In this case, a number of costs that are not related to the activities of departments or specific products will be posted on a formal basis. In order to correctly distribute indirect costs, it is necessary to understand the ultimate goal of this distribution, maintain consistency in it and choose an adequate methodology.

Simply put, indirect costs can be considered costs that are associated with several business processes, the production of several types of products and are attributed to the calculation object by dividing proportionally to the appropriate base, and not directly with the creation of a specific product and the receipt of a specific income. These include costs for equipment depreciation and support, administrative and general expenses, marketing and distribution costs, as well as those that ensure the appropriate level of service and maintenance to meet all regulatory and legal requirements. These costs are generally not taken into account when creating products or providing services, but without them we will not be able to deliver products to the client and ultimately obtain financial results from our activities.

I will illustrate the distribution of costs in complexly structured companies using the example of the VimpelCom group of companies. This is a centralized multi-organizational and multi-country holding company present in different parts of the world. At the top level of the management hierarchy of the group of companies is the headquarters in Moscow, and then segmentation is made into blocks based on geography (Russia, CIS, international business). The next level of reporting and segmentation is each country. In Ukraine, companies of this group are engaged in several areas of telecommunications business, and large ones also have a distributed branch network.

In this article we will look at the principles of cost sharing from the level of the headquarters in Ukraine to the level of the final product or service that can be produced by one of the companies of the VimpelCom group in a specific region or branch. We will not delve into the distribution of costs at the level of the headquarters and the CIS bloc, which includes Ukraine, since in this example the cost distribution scheme at the country level is similar to that which exists at the level of a group of companies in Ukraine.

Division into central bank

The main criterion for the distribution of costs in the VimpelCom group, as in many other organizations, are the requirements of shareholders and management, based on their vision of what kind of management reporting and, accordingly, costs must be provided in order to obtain the most objective information about the profitability of a particular product, efficiency a specific business unit, branch, etc.

The first level of indirect cost allocation is country-level cost allocation. The next level is the breakdown of costs in Ukraine by business area depending on the type of service. In our holding, these areas are mobile and fixed-line communications, which are divided into segments depending on the types of clients: B2B wholesale market (business relationships and services for telecom operators), B2B business (telecommunications services for the corporate client market), as well as basic B2C services (for the mass market).

This is followed by the allocation of costs to budget responsibility centers (BRC). By CBO in the context of this topic, I mean cost centers (cost centers), although in parallel there are also profit centers (profit centers). Initially, central banks are allocated based on the structure of the company according to functional characteristics (in other words, the division into centers of budgetary responsibility is based on the functional principle). Thus, the owner of the central bank is responsible for the complete block of specific functionality. Based on this approach to classification, for example, a sales division is identified as a central bank, which, in turn, can be divided into several budgets based on functional characteristics, say, by segments of corporate clients and mass services. Other main centers of budgetary responsibility that exist in our holding are marketing, IT, technical department (carries out planning, construction and operation of the network), financial service, HR department (working with personnel and organizational development), general management, purchasing and logistics department . In other companies, the division into centers of budgetary responsibility can be structured differently, for example, on a regional basis.

Within each budget responsibility center at VimpelCom, there are several cost categories, since it is, in fact, a mini-company. Just like in a holding, the central bank has its own hierarchy - headquarters, branches, regions. Each center may be responsible for the revenue side, direct costs, as well as indirect costs - personnel, administrative and office expenses, promotion of products and services, customer retention and service, technical, etc.

Level of detail

The main category of costs of any central bank is personnel costs. The other most frequently considered category is general expenses. They are allocated to a specific center of budgetary responsibility for conducting activities (costs for office needs, IT support, administrative expenses). In addition, the holding has a common owner of budgetary responsibility for certain types of costs (for example, training costs throughout the holding are managed by the personnel directorate). As a result, we have a matrix structure of control and costs. Planning is carried out at the level of each central bank, which has its own cost limit for each item. Subsequently, all types of costs are consolidated at the level of the relevant service, and then control and their further distribution occurs from top to bottom. The initiation of the use of costs is carried out by local central financial institutions (branch, region), and control over the expenditure of funds according to the budget is exercised by the owner of these centers, who is responsible for the consolidated result (in the example given, this is the personnel directorate).

How deeply should the structure of budget responsibility centers be detailed? It all depends on the requirements of shareholders and company management, but it should be noted that too high a level of detail is not very reliable in the long term. The criteria for defining customer types may change over time, in which case materiality levels and business processes would change accordingly. Because of this, it would be necessary to rebuild all budgets, which is quite difficult and time-consuming. If we want to highlight some costs for focus analysis, say, costs of working with large, medium and small businesses, individuals, then in this case the general owner of budgetary responsibility for specific types of costs can independently distribute the necessary budget and control costs. At the level of a group of companies, such detailing down to the level of budgetary responsibility for a specific client does not occur, since it is difficult to outline the boundaries and clearly fix long-term criteria - they can often change depending on market conditions.

The next level is the distribution of costs arising at the central bank level to the level of the branch and region. To do this, management reporting can be prepared for each region, detailing a cross-section of the Central Bank budget in the context of each branch and region. Then we will get deeper segmentation to analyze the performance of a specific geographic division. The next section is the segmentation of some central banking services to the level of the product line and services that are consumed directly by the client. This level of distribution and analysis exists in parallel with the distribution of costs between the central bank, branches and business areas, which makes it possible to compare the actual return on the promotion of a particular product or a certain service in different branches or regions. This cross-section can be consolidated on a bottom-up basis from the branch level to the headquarters level on a national scale.

The danger of decentralization

Divisions of branches and regions are always closer to the market, and if they see that the situation is changing quickly, they can take the initiative to further segment costs within their budget. However, caution should be exercised. If the segmentation of budgets and, accordingly, the distribution of costs is too detailed, this will lead to a strong fragmentation of costs and, as a result, to a loss of control and manageability, which, in turn, will cause a decrease in the efficiency of the entire business. A good historical example of chaotic decentralization is the fragmentation of Kievan Rus into principalities. As soon as the state was divided into many principalities, the integrity of its organization was lost. The same thing happens in the company.

The level of detail in cost allocation should be such that there are not too many budget owners working only for the sake of their function. To do this, the division of costs must take into account the strategic business goals of the group of companies, for the achievement of which the organization is built and budgets are allocated. In addition, a clear balance is required between centralization and decentralization of levels of budgetary responsibility and, accordingly, the division of indirect costs.

Comparable values

The distribution of indirect costs occurs depending on how they were planned within the budget process based on the principles by which individual CBs are allocated. You can require a business to make very detailed cost allocations down to an individual product or service, but if this is not included in the budget, then such detail will not help you make the right management decisions. In this case, you will not have planned indicators with which to compare the actual values ​​obtained. Changes in the principles of distribution should occur only after appropriate changes have been made to the plans, otherwise it will be impossible to assess the actual result, because there is no starting point for monitoring in the form of planned indicators. The cost allocation method must be based on how the costs were originally planned so that comparable amounts can ultimately be compared.

It would not be superfluous to make a retrospective distribution of actual costs of past periods according to the current principle, so that the performance of a particular division or product can be compared over time. For this purpose, all costs must be similarly distributed over previous periods in the same new section and according to the same criterion. Then we will be able to analyze the implementation of budget indicators and compare a specific current result with the results of previous periods.

Allocation of costs between legal entities

It should be taken into account that it makes no sense to allocate costs at the holding level and analyze them in the context of individual legal entities that are part of a group of companies. In complexly centralized holdings, when a group of companies is built from several legal entities, the analysis of the profitability or profitability of an individual company is not identical to the actual profitability or profitability of the business. This is explained by the fact that in holding structures many costs can be concentrated on specific legal entities (for example, service, contracting functions in relation to other companies of the group), resulting in a skew in the level of costs. At the same time, the main income from clients will be received by completely different companies of the holding, which, for example, have licenses to carry out certain types of activities.

With an even distribution of ownership and share capital in such companies, redistributing costs between them does not make much sense. For owners, it is more important to obtain an overall consolidated result from a group of companies in the plane of the required cut. Allocation of costs between legal entities is more important for tax planning and the formation of standard reporting, including according to international standards. That is why, in order to get a real picture, it is not always necessary to look at an indicator such as, for example, the profitability of an individual group company or the profitability of its products, since the formal reporting of a single legal entity sometimes does not serve as confirmation of whether all services and costs are really concentrated on this company. Therefore, it is reasonable to build management reporting for a holding at the level of a business line, central bank, or product section, without reference to specific legal entities. Our reporting is built precisely on this principle, and this is its main value.

Solution to the dilemma

From the point of view of budgetary control and analysis of the effectiveness of business activities, it is correct to establish several levels of assessing profitability and costs and, accordingly, create P&L (profit and loss statement) options. In one of them you can post all the indirect costs incurred by the headquarters or service function of the holding. However, to analyze the profitability and efficiency of a specific division or product, it is more correct to use costs that can be influenced by the owner of the central bank or by the one who creates additional cost and value in the product chain (added value chain).

A solution to this problem may be the distribution of indirect costs based on KPIs, which determine the content of a product or service with final consumer qualities. At the same time, as already noted, a reasonable balance must be maintained between centralization and decentralization of costs, between the level of aggregation of the central bank and division into smaller units.

Distribution by KPI

The most common method of allocating indirect costs is the direct method. But for it to be effective, not all costs must be centralized. Some of them initially need to be planned at the level of a specific central bank, branch or product. At the same time, KPIs must be established for each category of centralized and decentralized costs, which measure business efficiency. Conversely, in order to achieve KPIs, for each of them it is necessary to determine the necessary costs through which they can be achieved.

If we have established, for example, a KPI for the profitability of a specific product, then in order to fulfill the plan, we must calculate the minimum level of sales and income from the specified product, which, in turn, will also be considered as a KPI. An appropriate level of variable costs associated with achieving a given level of profitability will then be established, as well as a maximum level of fixed costs. There are now three main metrics that need to be managed to achieve the first KPI - profitability. The efforts of three divisions should be directed towards its achievement - those responsible for generating income, managing variable costs, as well as the Central Bank, which manages fixed costs based on the results of the first two divisions.

Once business KPIs are established, the direct method of cost allocation is quite simple to use, which is why it is practiced in most companies. A classic example is the distribution of personnel costs depending on their number, although it would be more correct to set as a KPI, for example, a certain level of sales over a certain time. In this case, managers must calculate the resource required to achieve this indicator, then it will make sense to allocate expenses not according to the number of personnel, but depending on their activity. If we want to sell, for example, 10 thousand units of products, then we look at how much one seller should sell, and based on this we calculate the required number of personnel. Thus, personnel costs are tied to the achievement of a specific KPI and are allocated to the volume of products sold.

If we are talking about advertising costs, then initially a properly planned advertising campaign should be based on certain KPIs established for specific regions, for example, how many sales should be made by the owner of the central bank responsible for sales in the region after the advertising is released. Depending on this, the marketing service must determine how many contacts need to be established with potential audiences in the regions in order to help the sales department achieve this target. Based on the specified data, a sales plan is calculated, which includes the number of contacts with the audience required to implement it in each specific region. Thus, when planning indirect costs, we immediately proceed from what result needs to be achieved by allocating costs. At the same time, it is necessary to move away from this practice, when at first costs are incurred centrally as a whole, and then a decision is made on how to distribute them to the level of individual divisions/products. In the correct version, the goal for achieving which we incur these costs is initially determined. Then it is converted into specific KPIs for each division or product, after which costs are planned immediately in the context of individual central assets or products for a specific activity.

When allocating costs, you should also take into account that the regions covered by the company's activities differ in area, population and purchasing power. Therefore, when setting KPIs for a certain region, it is necessary to use not the actual customer base, but criteria characterizing the number of buyers/clients that we could attract. If the population of one region, for example, is 100 thousand, and another is 500 thousand, and in each of them, say, 50% of the target audience watches TV, then in the first region we get 50 thousand potential buyers/clients, and in the second - 250 thousand. In the future, with the costs allocated, we will compare how much we actually managed to attract buyers/clients. This will be an objective indicator of cost effectiveness: in one region, out of 50 thousand potential buyers/clients, we were able to attract, say, 10 thousand, which is 20% of the total audience, and in another, out of 250 thousand, we attracted 25 thousand. , but that's only 10%. Costs were spread more widely across the larger region as there was more room for sales growth. So it turns out: those divisions that did not fulfill the plan will have higher unit costs per attracted client compared to those that fulfilled their plan. And if a division does not demonstrate the required efficiency and its costs per additional hryvnia of income are higher compared to other divisions, then during the next planning it will most likely receive fewer resources. In addition, in the future, other criteria for cost distribution and other KPIs for such central banks may be used, which will also affect the volume of allocated resources and cost budgets.

Assignment of costs

In addition to the above examples of distribution of marketing and advertising costs, such general business indirect costs as costs of legal support, corporate or PR events, etc. are also distributed. But in these cases, we must also clearly define the purpose of specific costs. If we want, for example, to present the financial results of a corporation for the year and hold a press conference on this occasion, then the value of such an event for a production unit, branch, and even more so the added value for an individual product is almost zero. Therefore, such costs should remain at headquarters. If these are corporate events to promote or launch a new brand, then these costs should fall evenly on all departments involved in the product/service production cycle.

Do not distribute!

Finally, let's look at costs that should never be allocated and remain at headquarters. These are the costs of its personnel, administrative and business expenses of the headquarters, as well as financial costs of servicing loans.

As theoretical exercises, we can distribute them according to some criterion. However, the efforts made will be meaningless because a particular branch, division or product cannot be held responsible for costs that are not directly related to it. In this regard, it is best to consider the headquarters as a separate central bank and analyze the dynamics of the growth of its costs to the total income of the company, the change in their share in the structure of all costs.

If we mechanically distribute such costs, we get the following picture. A certain branch received income at its own expense, reaching a certain level of profitability. But at some point, using specific indicators - by income, number of employees, or other criterion - we will distribute the costs of the headquarters across all central banking institutions, branches, regions, products. As a result, our branch may enter a deep negative zone in terms of profitability.

At first glance, the branch or product appears to be ineffective. In fact, the results are distorted by costs that do not create added value in a certain segment/section/region, but, despite this, were transferred to the branch from the level of centralized functions. To avoid making such mistakes, it is better to take into account costs in the context of a specific central bank, branch, region or product separately from general administrative costs at the headquarters level.

In the future, its costs will be taken into account when calculating the efficiency of the entire business of the group of companies. In this case, there will be no need to focus on the reasons for the increase in the costs of the branch or the costs of the product in the amount of 1000 UAH, while the costs of the headquarters increased by 100 thousand UAH.

The correct approach to allocating indirect costs is to selectively allocate, based on relevant KPIs, only those that are directly related to specific CBs, branches, regions, products or services, and consider the example indirect costs of headquarters separately. , without their distribution.

Practitioners' experience

Whatever cost allocation method is adopted, it must be used consistently, with understanding and awareness of the decisions for which it is applicable

Andrey Stitsyuk, Financial Director of Farlep-Invest OJSC:

Quite a large number of articles and textbooks have been written on the issue of distribution of indirect costs, and Lubomir Kociumbas describes everything in detail and completely, so it is difficult to add anything new. However, I am sure that the problem at hand is not as simple and straightforward as it seems at first glance. Especially if you start the discussion from scratch, namely with an answer to the question why it is necessary to distribute indirect costs at all.

In this regard, I would abstract from discussing the topic of cost allocation in the context of budget management, since the issues are actually different. The purpose of budget management is to control the implementation of assigned tasks by individual employees, departments and the organization as a whole, that is, we are talking about tasks and clearly defined responsibilities. Cost allocation is carried out, as a rule, on the basis of subjective judgments or, at best, some indicators (KPIs), which are not often associated with “certain responsibility”. It is more correct, in my opinion, to discuss the issue of cost distribution in the context of comparing various segments of the company with each other and with standards accepted throughout the world (best practice, benchmarking).

It should also be taken into account that cost allocation is part of the management accounting and reporting mechanism used for making management decisions. The specific functioning of this mechanism depends on what goals the management is pursuing (what questions it is trying to answer). In the case of the Beeline group of companies in Ukraine, the answer is obvious: since it is part of a large multinational company with its own accounting and reporting standards, it needs to comply with these standards.
Companies whose management is not bound by certain non-negotiable imperatives still need to rack their brains over the question: what kind of information is needed to make decisions? If management is considering selling part of a business and wants to get information about what the company will look like after the transaction, it is obviously worth using the marginal allocation method, attributing all existing synergies to the benefit of the business being sold. For example, marketing costs may not be reduced in the expected proportion, since there is image advertising, fixed costs for PR, which depend little on the number of business segments, especially if they are of different sizes. This marginal allocation method may be appropriate in a situation where one segment is considered by management/shareholders to be the primary segment and the rest are considered secondary.

If a company wants to be able to analyze and control changes (dynamics) of costs, then the chosen cost distribution method is not particularly important - its constant and adequate application is more important.

I definitely agree with the author that it makes no sense to distribute all costs (except in cases where such distribution is regulated by regulatory authorities, such as the US Securities and Exchange Commission - SEC). If we try to formulate a rule for determining the costs to be distributed, then I would say that in order to generate management reporting for the purpose of comparing different business segments with each other, it is worth distributing only those indirect costs for which there is an objective, logical and different from that used for others cost items distribution base. For example, information on the distribution of company audit costs by business segment as a whole is absolutely useless. In this case, it is enough to analyze the profitability of various segments in comparison with the ratio of non-allocated costs to company income.

Every leader must first of all be guided by the assigned tasks and common sense. The main thing to remember is that whatever method of cost allocation is adopted, it must be used consistently, with understanding and awareness of which decisions it is applicable for, and for which it is necessary to use a different method.

Oksana Komarnitskaya, Financial Director of the Henkel Group of Companies in Ukraine:

Here are several types of indirect costs that are distributed in our group of companies: maintenance of equipment and buildings; salaries of middle and senior management of production; salaries and costs of HR, finance, IT functions working for the plant; security services. Accordingly, we use different cost allocation keys. For building maintenance - square meters; for costs of auxiliary functions - the number of factory employees; for security services - also the number of factory employees; for the distribution of salaries for middle and senior management of production - the percentage of time spent at each of the factories of the group.

We do not distribute the costs of finance, HR, IT departments, lawyers, who work without reference to production, but perform their functions as a whole for the company’s business. We also do not distribute the costs of the general director, the purchasing and logistics department, and administrative costs for maintaining the activities of the head office. The analysis of such costs occurs by their type and centers, including per employee. For example, business travel costs per employee, training costs per employee, etc.

I agree with the author of the article that it is necessary to distribute only those indirect costs that are directly related to specific central banking institutions, branches, regions, products and services. I will also note that it is possible and necessary to plan costs immediately at the level of specific branches and products, if there are clear rules regarding what costs are distributed and according to what criteria, and also if the company does not plan to change these distribution keys. There may be inaccuracies in the monthly breakdown, but for the year as a whole, such costs can be planned quite accurately.

If a company seriously monitors the fact of costs and the reasons for deviations of the fact from the plan or budget, then as a result of changes in the principles of distribution of indirect costs without making corresponding changes to the budget, such an analysis will at least lose its meaning. Therefore, adjustments related to new principles for the distribution of indirect costs should always be reflected in the budget.

Our controlling department is responsible for cost distribution and planning. We determine the principles and keys of distribution together with the production director. The approved principles are necessarily communicated to plant directors.

Anna Novikova, Financial Director of LLC PII "TRK "NBM" (Channel 5):

In our group of companies, cost management is centralized due to the use of flexible budgets and the dependence of the distribution of indirect costs in the group on profitability indicators (KPI).

We divide the Central Federal District (CFO) according to functional characteristics. Each central federal district has its own budget and is responsible for the implementation of planned indicators. It is worth noting that in our practice we do not use static budgets, but only flexible ones. The head of the functional unit is also responsible for the Central Federal District. Within a division there are certain levels of delegation of responsibility, but this is the internal policy of its leader. Also within the Central Federal District there may be people responsible for one or more areas of activity and associated costs.
There is no point in deeply detailing the distribution of indirect costs at the level of a group of companies - this would clutter the reporting with unnecessary information and make it difficult to perceive. But at the level of the Central Federal District, detailing allows for better control over expenses, determining the need for certain activities and carrying them out in a timely manner, and also makes it possible to manage the budget of the Central Federal District depending on production needs. At the planning stage, each central financial department presents its vision of direct and indirect costs depending on the overall budget of the group of companies, strategy and management decisions made. In the future, these budgets can be adjusted or remain unchanged.

Planning occurs in two stages.

1. At the first stage, plans for the Central Federal District are created from the bottom up.
2. At the second stage, the group’s plans with the corresponding indicators for the Central Federal District are approved from top to bottom.

At the level of the Central Federal District, we plan all types of costs, including indirect ones. This makes it possible at the planning stage to see the whole picture at the level of the division and the company as a whole. Costs that are not distributed at the level of the Central Federal District are accepted as costs of the management company. First of all, these are taxes, expenses of financial and investment activities, and depreciation. Costs for personnel training, PR and marketing activities, technical and IT support are subject to distribution.

In our group of companies, it is not customary to separate indirect costs by legal entity. This is related to the specifics of business. In addition, it is the analysis in functional areas that is most revealing. Since almost all central financial districts are cost centers, this involves analyzing their contributions to the company’s development, achieving strategic goals, their contribution to the company’s attractiveness to customers and the realization of its competitive advantage. I would like to note that in the current conditions, analyzing the contribution of the Central Federal District to the attractiveness and future capitalization of the company takes on special meaning.

I completely agree with the author of the article that on the basis of KPI, it is possible to distribute indirect costs, as well as distribution per unit of production or per unit of marginal income. The distribution method depends on the goal being pursued and what we want to see as a result of the analysis.

Sergey Polishchuk, Financial Director of the company "Auto Renaissance":

The issue of distribution of indirect costs, as for me, is ambiguous. The main reason for its ambiguity lies in the answer to the question, why and who needs it?

I dare to disagree with the author that the adequacy of management decisions depends on the quality of distribution of indirect costs. As we know, the universal and textbook tools for analyzing management decisions are a set of logic based on marginal analysis. These are, first of all, the classics “make or buy”, “input - output”, “output under conditions of limited resources”, etc.

To make these and many other management decisions, there can be no question of any distribution of fixed indirect costs. Well, let’s say, what’s the point of me assessing the profitability of a product with allocated indirect (fixed) and indirect costs and making decisions on this basis? What is the benefit and payload of this?

It is clear that reporting policies and data reporting standards vary from company to company. Accordingly, different goals are embedded in such standards. But I would try to shift the emphasis not on the issue of distribution of indirect costs, but on the issue of control over such costs. Here it is difficult to disagree with the author about the importance of monitoring the responsibility of each central bank over these expenses and the role of the so-called drivers or KPIs.

With regard to budgeting in holdings, this approach acquires particular importance and significance. The focus of the holdings' budgetary responsibility is the product. Let's take, for example, the same advertising in a holding company engaged in the production and sale of cars. If we initially plan advertising as a variable cost in relation to the volume of planned sales units, then the budget fund for advertising of everything, according to the models, is quite tangible. In this case, we initially have a driver (consumption rate per car) and KPI (sales plan). The task of each specific department of the Central Bank is not to exceed these values, understanding that with a sales plan of X, the advertising plan of Y will not be overspent. With constant or irrelevant expenses, it is better not to conduct such experiments, but to reflect them as is, limiting oneself to understanding and control of the absolute figures of such expenses by the responsible central bank or specific departments, or even personalities.

To summarize what has been said, it should be said: both for the purposes of cost management and for the purposes of making management decisions, there is no need to make Herculean efforts to distribute indirect fixed costs. It is much more important to know their drivers (factors and carriers) and actively influence them. Then all efforts in the field of budget planning will not turn into a process for the sake of a process. After all, the main goal of organizing any system is the effect that such a system gives to its owners. If we talk about budgeting as a system, then ultimately it is:

1. source of data for making informed management decisions;
2. source of the internal control system;
3. source of internal self-organization and growth.

Peter Bonchkovsky, Deputy Director for Finance of the SAVSERVICE group of companies:

The term “cost management” appeared relatively recently, and it comes from the concepts of “cost accounting” and “cost allocation”. Actually, cost management implies the relevant distribution of costs with an understanding of the cause-and-effect relationships of economic blocks of income, the costs incurred to obtain them, as well as the assets used for the same purposes. When building a budgeting model in a holding company, you must always adhere to the presented logic, otherwise the budgeting process will occur exclusively for the process.

When constructing the management structure of financial responsibility centers (the author has the CBO), I would like to highlight three points. Firstly, it is necessary to clearly delineate the Central Federal District: investment center, profit center, income center. Secondly, when cascading these centers, it is necessary to focus as much as possible on significant information on the basis of which decisions can be made. Each central federal district has a leader with specific goals, for which KPIs are determined - also an important component of the budget model. Thirdly, when building a budget model, you should determine whether you can obtain a fact in the same structure, otherwise you will have to compare incompatible information. I agree with the author of the article that there is no need to look for a basis for determining the structure of management central financial districts based on the legal organizational form of the holding.

You can be as creative as you want when modeling cost centers. I am a supporter of the functional approach. This means that costs must be perceived as necessary expenses to create surplus value, taking into account the objectives of the function, which bring value to the CFD. Then, inside the function, you can create a branched cost distribution tree, understanding why this is needed. The author rightly noted that the construction of cost centers and methods of their distribution also depend on the policy of centralization and decentralization of individual functions. Each holding has its own.

Cost allocation, from my point of view, is the most delicate segment in management budgeting. In order not to be mistaken, it is important to remember that depending on the set of distribution objects, costs behave differently and can be constant and variable, direct and indirect, distributed and undistributed. I won’t describe the essence - it is clear. I just want to say that at least all costs can be distributed across the Central Federal District, but it would be nice to divide them not only into direct and indirect, but also into variable and constant. It often happens that an article for a lower-level CFO will be indirect, and when you go higher, it becomes direct. Let me give you an example from logistics. If we evaluate the contribution to the financial result of an individual warehouse, then costs such as rent of premises, costs of utilities and administrative warehouse personnel will be constant. But if we evaluate the contribution to the financial result of an individual customer, then these costs, in economic terms, become indirect.

When searching for cost distribution bases, I recommend using ABC costing. Using this method, with correctly selected denominators, you can obtain valuable information for making management decisions. For example, to distribute the cost item “office rent” among cost centers, denominators such as “number of seats per area” or “number of occupied square meters” are suitable. The content of this cost immediately becomes clear. In other words, when building a budgeting model, you need to remember that the cost part should trace the amount of resources consumed by the areas generating cash flows, as well as the cost of these resources.

Maxim Gapchuk, Deputy Chairman of the Board for Finance of TAS Insurance Group JSC:

There is no uniform method for allocating direct and indirect costs (costs) for all companies. Each company, as a living organism, is at a certain stage of its development, and this predetermines its characteristic cost management methodology. For example, for rapidly growing companies, costs associated with personnel or rent may, for a certain period of time (usually from three to nine months), be investments for development in a particular region, in this case - indirect costs. At the same time, for a company operating in an industry that does not have strong changes in sales growth/decline, these costs will primarily affect the assessment of the effectiveness of a particular division or region.

In my opinion, the main criteria for allocating indirect costs are:
if costs form the added value of a division or influence it, then they must be attributed to the division’s costs;
if costs are initiated by a division, then they must also be assigned to this division.
In my opinion, it is not necessary to attribute absolutely all indirect costs to CBO. It is quite enough to highlight costs that are not directly related to one or another department and consider them as an administrative burden on the business.

Speaking about the administrative burden on business, we understand that in business there are three categories of central bank: profit centers, cost centers and management center (head office). With this definition of central bank categories, all indirect costs that do not relate to profit centers or cost divisions must be considered as an administrative burden on the management center associated with business management. In most cases, these are costs associated with business management (management costs). These costs can also be divided into investment, marketing, etc., but they all relate to the head office. The approach to cost management in different industries can be different: in one case, the administrative burden is set as a fixed amount (this is mainly a stable business), in another - as a percentage of the company's turnover (this is the approach we used when developing the business). The owner or manager determines their level (in amount or percentage) to the total business volume of the company/group and further management of this level depending on the company’s strategy. If such costs need to be attributed to business units, then this can be done in proportion to the profitable CBOs.