Identifying the Three Types of Costs
Written by the Controller | CFO Advisor Team
Throughout our education and careers we learn that there are many ways to arrive at the same answer to a question. For business owners, the best answer is the most efficient and least costly as possible. A key question – Is my business utilizing all of the advances in technology to our best advantage? Am I overpaying for features that I do not need? Do all the steps in the process add value to the customer and are they necessary? As business events change we need to continually adjust our processes accordingly.
Activities that provide value in excess of their cost are termed value-added activities. Conversely, activities whose costs exceed their benefit are considered non-value-added activities. Non-value-added activities should become candidates for elimination or transformation into activities that do add value. The premise is that an organization performs activities to support the creation of value for its customers. In order to evaluate activities two types of information are needed: (1) the actual value the activity creates, and (2) how much does it cost? An organization creates value by transforming inputs into outputs. Inputs include materials, workers, equipment, etc. Outputs are the tangible goods or intangible services that have value to the customer. There are four basic methods for creating value: 1) altering an item, 2) storing an item, 3) inspecting an item, and 4) transporting an item. It is important to note that value is determined solely by customer perceptions. As an example, adding elaborate design characteristics or options to the product without considering the needs of the customer, does not add value. Thus, while there are four ways of creating value, simply performing a value-creating activity does not ensure that value was created. For value to exist in the product, the customer must perceive that it exists.
Non-value-added activities can be classified as necessary and unnecessary. Necessary non-value-added costs relate to activities that do not add value, but must be performed as part of being in business, such as making collection calls or financial statement preparation. Unnecessary non-value-added activities are wasted efforts, because they do not create value to the customer or are not a necessary part of being in business and, therefore, should be eliminated.
BIK’s outsourced Controller|CFO Advisors can help your company address value added activities and non-value-added activities.
The BIK Controller|CFO Advisors:
Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Mark Stricker
Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically. Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209.
Visit our web-site at www.bikcfoservices.com.