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Analysis of Direct Costs

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Nowadays more and more companies determine prices of acquisition, forecast costs of future production and allocate different types of costs with help of computing software using special writing mechanisms. However, it is rather impossible to calculate prices, allocate direct, indirect and semi-variables types of cost and make decision about purchases based only on conclusion of writing mechanisms. Therefore, analysis and a deeper understanding of costs and how to account for them in prices are covered in current paper.

Any business is aware of two main pure types of costs and a mixed one. Direct costs are expenses for those resources that proportionally influence amount of production. They are labor, raw materials, and natural resources. Direct costs have got typical features. They are primary and usually considered first. They cannot be easily cut; otherwise they will decrease amount of production.

Indirect costs are expenses, which are connected with organizational and managerial aspects, administrative and non-material assets, such as advertising, branding, logos, certificates, licenses, etc. They do not always reflect the amount of production (Bessen and Meurer, 2012).

Semi-variables are costs that can be a part of production chain as well as irrespective overheads. Electricity, telephone bills, labor costs can be semi-variables. For example, if a company deals with sewing process, then electricity that sewing machines consume will be direct costs while electricity consumed by office workers will be indirect costs.

All of these costs are summed up in a product cost. Mechanism of such calculation is quite complicated for human being as well as for computing software basing on writing mechanics. For production of one or another service or good, any  calculating machine provides standardized figures. These figures are divided into direct, indirect and semi-variable costs (in different circumstances these parts can mix). Direct costs are usually estimated and forecasted on the grounds of standards and prior experience. It means that in computing system there is a special table which can measure how much wheat you need to produce a muffin and how much it will cost you. To calculate indirect costs, it is necessary to monitor such expenses during a time frame, for example one month, and sum of such indirect costs must be divided by the number of produced items.  The last stage is to sum up all costs.

Price analysis mechanism completely differs from cost analysis mechanism on the ground that  price is a value that people are ready  to  pay for goods, and cost is a value that people are ready  to  invest to produce those goods. After calculating cost of the product, in order to set the price, it is necessary to add marginal costs which depend on profit that manufacturers or service providers want to earn. The final price depends on the product, its USP, up-market or down-market position, competitors’ position and other macro and micro characteristics.

It is more difficult to forecast an acquisition price. It is necessary to look through “top-down and bottom –up projection” starting from the main ones, such as industry development, general tendencies, market share, acquisition popularity, last years’ reports and other aspects depending on industry (Cody and Weber, 2007).

Looking at complicated procedures in such analysis, it can be concluded that writing mechanism for these calculations is likely to make errors (Murphy, 2009). These errors include inappropriate allocation of costs, identifying semi-variables costs for different cases industry indexes simplification, competition, consumer power. These aspects are difficult to be measured. To avoid such errors, it is necessary to make such analysis with help of different writing mechanisms and accounting systems; yet, specialists’ manual rechecks and comparison with previous results are not less necessary.

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