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Definition and control of costs: continuous decision-making

cost-1174936_1280This post does not deal with measures and tools to control the expenses and to be able to balance the accounts and meet the budgets. I’m sorry to disappoint anyone who has understood that from the title. It is more related to another post I wrote recently in which I talked about how to configure the value of stocks. It seems to me that in that article perhaps I left an implicit message that I did not intend to disseminate: that of the existence of a single and absolute cost value.

I explain myself. Firstly, the following question must be asked: What is the purpose of the cost that I am going to evaluate? Depending on the answer, you should set the costs accordingly. In this way, if we want to obtain the value of our inventories, the inputs and criteria used will be (or may be) different from those used to determine the selling price of a product, for example.
Thus, in the case of wanting to valuate the stock we have a normative guide that helps us to know what costs to charge, but they do not necessarily have to be the same ones as if we try to make a decision on the margin intended in a sales article. In the latter case, it may be interesting to consider the costs of distribution, marketing … In addition, we can consider that in one case an ABC method builds more faithfully the cost, while in the other, Full Costing model cab be the ideal one.
Besides, we must add the decisions we have to make regarding the nature of a cost (direct/indirect; fixed/variable with respect to what, product or activity; period/product …).
Recalling a well-known article by Robert Kaplan on the subject, one might ask not only whether we should perform different cost calculations for different purposes as we commented, but whether this involves having different cost systems. That is, if, on the one hand, we would have a system to obtain the costs for the purpose of valuing stocks, and, on the other hand, other systems to determine the selling price of an item, or for Operational control. And here is an interesting debate, since each of these systems require different inputs (although some are common), their frequency is different (efficiency information may be needed on a daily basis) and the applicants differ (Finance, Production, Sales …), which makes it necessary to clear the question of whether the return of all this information justifies having several cost systems which, moreover, must be reconciled. This will be nonsense, for many Finance Directors eager to have a single tool that facilitates management. But the truth is that the characteristics of the company and its operations will be the ones that require us to configure the cost systems.
As we see many decisions to make in the field of cost design.

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