Chapter 6 – Understanding Key Cost Relationships
As I begin Chapter 6 I’m crossing my fingers for a little less acronyms and formulas than Chapter 4, but I’m not holding my breath! It’s not that I didn’t thoroughly enjoy – and learn – during the previous chapter, but in the past I’ve fostered a loving, relaxing relationship with reading. It wasn’t until University that reading has become a bit of a stressful endeavor for me! Nevertheless, I’m excited to see what I’m going to learn today – I have to say, that is one of my favorite aspects of this subject so far; I’m genuinely learning brand new things, and increasing my existing (highly superficial) knowledge of other topics. Based on the first page of Chapter 6, I understand the exchange of value between businesses and customers – a product or service for money, basically. I always assumed that there were more economic, specific, in-detail ways for owners and managers to track the costs of their businesses, however I’ve never been privy to such things. My experience working in retail (many of which have permanently scarred me) has always been from the position of sales assistant, never someone who was in a position that required understanding such things. Once again, I think I’m going to only have a superficial existing understanding to apply to this Chapter.
The process of attaching costs to cost objects is a totally new idea to me – I guess it sort of sounds like the sorting-out and organizing we did in Chapter 4 with our financial statements. Basically, we’re re-arranging and organizing things so that we can get a better idea of what’s going on in our firm – a ‘la Marie Condo for accounting? What is NOT a new idea to me is how imperative it is that managers are aware of what the costs in their firms are, and that those costs are closely managed. In all the small businesses I’ve work casually or part-time in, the outgoings have always seemed to stress my managers out more than anything else. Skellerup Holdings have multiple departments and divisions – they have a range of brands that exist under the Skellerup umbrella, each providing different products and services to different customer bases. It makes me a little uneasy thinking that I’m going to have to dive into each one of these departments and understand what exactly they do. As I’ve mentioned earlier (probably 100 times now) Skellerup Holdings are an agricultural and industrial manufacturer, and I have nada / none / zero / absolutely ZIP experience in those industries, and I’m not someone with very much common sense either so I think this is going to be really challenging for me. This is the vibe I’m getting so far, three pages in. Maybe I’m being over-dramatic? Maybe I should be bracing for impact!
I agree with our friend, Dilbert, that numbers do create our reality. Certainly in business, I think most (if not all) decisions are influenced by numbers – and if they’re not, then maybe they should be. After all, the entire point of business is to make money! Profitability and efficiency (represented by numbers) should drive every decision (within reason – environmental considerations, working conditions, etc.). The idea of holding a firm’s manufactured products or raw materials as inventory (asset) to not overstate or understate the firm’s profit makes perfect sense – I assume this is something that the clothing and shoe boutiques that I have worked for in the past would have to do. I understand the concept of process-costing, however I’m seriously hoping to avoid this with my firm as I would have no idea about the separate manufacturing processes for each intricate, but highly varied product! I understand the idea of apportioning indirect costs, however I’m worried again about applying this to my own company, and how accurate and thorough I will be. At first I was glad to see a diagram (Figure 6.2) until I realized I had no idea what I was looking at … I think the path of overhead costs to products might take a Youtube video for me to wrap my head around (I’ll link any good ones I find on my blog!).
By and large I understand the array of costing systems in a theoretical sense. I do not, however, have any understanding of how I would apply this to my own firm without step-by-step instructions. I am now nervously reading through the chapter wondering what I will be able to apply to my firm, leveraging off my (absolutely insignificant) existing knowledge of agricultural manufacturing! The costing systems which makes the most sense to me is the pre-determined overhead absorption rates – I can faintly recall seeing figures expressed in a similar way to the Cadbury chocolate example in the past, however I feel like this would take exceptionally in-depth work to calculate correctly. I’m breathing a sigh of relief to finally arrive at the fixed and variable costs section of the text – now THIS is something I believe I understand pretty well already, and I feel confident that I could prepare a simplified version of this for my firm, if need be. In saying that, the last time I looked at fixed and variable costs was in high school math – so some revision is well needed. Cost-volume-profit analysis is something else I can remember from high school, and despite my affliction towards equations. I’m so happy to easily understand the cost functions for the gig at Indigo! Who knew I was secretly paying attention in high school all those years ago? Definitely not my math teacher at the time … The break even point of a venture is another aspect I’m surprisingly familiar with – although not from high school. I think I’ve read enough inspirational business start up stories to know the necessity of reaching ones break-even point. However the concept of a contribution margin is something I’ve never heard of. Despite my rollercoaster of emotions, I have greatly enjoyed learning about costs relationships. I find that it’s always easier to connect with information that can be applied to practical, daily scenarios – ones that might face a corner store or fish-and-chip shop owner – rather than trying to imagine how a global corporation would handle such things. The examples used in this chapter remind me of the practical math we used in high school, which I really enjoyed. Here is a short video I found on Youtube that explains the difference between absorption and variable costing:
Cooking the books with Caity 