I will come to the topic straight away and invite my friends @josepha, @suboohi, and @simonnwigwe to my favorite topic SLC | S21W1 | Costos para emprendedores - Introducción al costo.

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What is cost and how important is it for entrepreneurs?

Cost is a vital component of our business that provides information about expenses and financial decision-making. It explains the evolution of different industries, key concepts, methods, and different cost accounting.

Cost, a basic aspect of financial management, evolves around several key concepts to effectively understand and manage the organization's costs.

Direct and indirect costs:

Direct costs are directly linked to the production of goods or services. All costs, direct or indirect costs add to the value of a product and are taken into account even if indirect costs are not visible to inexperienced businesspeople but they play a vital role in the cost particular product or service and add to the overall production value.

Examples:

Direct costs: raw materials, labor for the manufacture of a specific product.
Indirect costs: factory rent, utilities, or management salaries not directly involved in production.

These are fixed and variable costs:

Fixed costs remain constant regardless of the level of production or sales, while variable costs fluctuate with the volume of goods or services produced.

These are also fixed costs: rent, insurance, and salaries of permanent employees.
Variable costs: raw materials, labor directly related to production, overhead costs, etc.

Costs include indirect expenses necessary for business operations but not directly associated with a specific product or service. These costs are important to maintaining the overall function of the organization.

Examples for instance:

Administrative salaries, facility maintenance, and depreciation of equipment.

Understanding these key concepts helps businesses make informed decisions about pricing, production levels, and overall financial strategy. Classifying and analyzing these costs requires either in-house knowledge of our business or the help of cost accountants.

Cost management plays a vital role in the running of any business, providing valuable insights for effective financial management.

Establish the difference between costs and expenses, giving examples of this through a real case.

Cost and expense are often used interchangeably, but their meanings are slightly different. Cost refers to the amount of money that is needed to produce or acquire a product or service. This can include materials, labor, and other expenses that are incurred in the process of producing or acquiring a product or service.

Expense, on the other hand, refers to money that is spent on something that is not directly related to the production of a product or service. This can include things like rent, utilities, and other operating expenses.

In short, cost refers to expenses that are incurred in the production or acquisition of a product or service, while expense refers to money that is spent on things that are not directly related to production or acquisition.

Cost and price are different. Cost is what we incur to make or acquire an item, and price means how much money we want to charge for selling it or getting it in the market.

Imagine that you are making breads in a bakery and giving it to your customers at the rate of 1 dollar per bread . This is the selling price of the bread, that is, its retail selling price, at which you sell it to your customer but this is not the cost of your product.

Generally, in any business, the profit of the businessman is also included in the selling price. That is, the selling price will increase more than the basic cost of this item after adding all the expenses.

Now let us discuss the cost. For example, to make bread, we need flour and skilled labor knows how to knead the dough and make bread in the bakery. But apart from just the price of flour and labor, a lot more has to be added to it. You have to add capital, interest on loans, rent of your establishment, the salary of the service staff, cleaning, maintenance, tax payment, etc., and other expenses common in all businesses.

In this way, you can make a rough estimate of the cost of your product. You do the same for your other products, and only after that can you decide the selling price.

Another aspect of this is the market price, and everyone has to decide the selling price of their goods according to the market price. If you buy bread and butter from a shop and the payment you make is its selling price, and if you add the expenses at which the trader has bought it, then it will be the cost of those goods for the shopkeeper. Then, after adding the profit, you get your actual selling price, and almost every businessman has to do similar calculations.

I can give you complicated statistics but here I am providing simple examples so everyone understands these differences easily.

What are the benefits of performing a good cost determination?

When we produce a product, the cost of material, labor and other overheads used, and the interest, rent, depreciation, equipment, etc.—everything counts in the value as well. We have to make provisions for unforeseen expenses and future developments in R&D in the process. All these are vital parts of cost accounting.

We know the importance of the cost of any product or product is the cost of the material used in it. Hence, to achieve the objective of cost estimation, it is very important to estimate the exact cost of the material.

Therefore, for the proper estimation of the cost of the material, it is necessary to have a proper plan of the work of the material and its distribution. It is necessary to evaluate them through various cost experts before making them available in the market.

To determine their cost correctly, the quality of a certain weight determines the quality of the material used in advance, which could improve the profitability as well as the reputation of your company.
A businessperson should know the importance of his product's quality of the material at the right price so that the production cost is not affected by the variation.

Costing of materials is vital

To ensure a correct and accurate assessment of materials issued for various production operations, it is important to correctly cost the material according to the targeted market.

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How do you determine the costs of your business? If you are not an entrepreneur, how would you do it?

To create and start a business, we need to manage finances according to a business plan, whether it is our own or arranged by financial institutions, so for this, we should know the proper channels, like chartered accountants who have tie-ups with banks; they do the finance management for a certain fee.

So first of all, we need a business plan. A business plan, with complete details of our business that covers everything like what we will sell, how our business is structured, our target market, how we plan to sell our products and services, our financial projections, what funds we will need or what licenses and permits we will need, and which departments we will have to apply to, etc.

It is easy to say, but starting a business is not an easy task. It requires a lot of hard work and patience to start and keep it running. When we plan to start a business, our time, planning, market, and financial condition matter a lot. Whether we will be able to enter the market successfully or not is also a point of consideration.

I am not in the bread business, but heavey welding transformers and equipment sold in millions of dollars per month. But to keep it simple, I have chosen to give you a simple business model and kept the budgets and expenses within the practical limit.

As we all know, every business keeps a record of its inventory and sales for the entire year, but the fact remains that every business keeps a close eye on a daily, weekly, and monthly basis. In most businesses, one has to submit a return quarterly but go through a computation process regularly.

Let me add that product cost and profit margin are different based on quantity and likely to change depending on the situation of the market and demand, so we have to change our costing strategy depending on the market conditions.

Example for determining the product cost of a manufacturer.

Suppose a business manufactured 1000 breads per day and sold its product at $1.
Now I will give you the breakup on a daily basis: