GCC countries are going through challenging times economically because of heavy reduction in oil prices, strengthening of dollar etc. Hence under such challenging times, it is very important for any business to understand its cost structure thoroughly and also look for areas where cost can be reduced. There are financial auditors in Dubai, UAE who can help you for understanding the cost structures. Any businesses have two types of costs – Fixed Cost and Variable Cost.
Variable cost is incurred only when there are sales orders. Fixed costs are incurred irrespective of sales orders. Hence it is important to analyze and understand various components of fixed cost to explore the possibility of reducing overall fixed overheads particularly when the utilization of assets for which they are incurred is not optimum. Similarly, various components of variable cost should be analyzed to explore the possibility of reducing it at the per-unit level by measuring the value addition made and the cost incurred in that regard.
Cost objects: These are the target of cost calculation such as products, services, market, customers, etc.
Resources: They are used or perform work that gives rise to costs eg: machinery, computer, personnel.
Activities: These are the sort of work the resources perform eg: Setting up the machine, ordering raw material, designing a computer system, etc.
Cost Drivers: These are the means by which the activities are characterized and relinked with the objects being costed eg: number of set-ups, number of manufacturing orders, etc.
There are many case studies which have proved that activity-based costing is a more effective and practical method to allocate common overheads among products / Projects/depts. Hence when the businesses try to understand the correct cost structure of a product or project or dept then it must use activity-based costing as a tool to get a clear picture.
A clear understanding of the structure of the cost of business, exploring the possibility to reduce cost by studying the above areas and implementing the suggestions given can help businesses to become more competitive which is the need of the hour in today’s challenging business environment.