3 Types of Operational Cost that Determine Your Business

3 Types of Operational Cost that Determine Your Business

Operational cost is a type of cost in business activity. It was thanks to the operational cost either a fixed cost or variable one that a business can operate smoothly.    However, you need to understand that   Operating costs exclude expenses that are not related to the company’s business activities. Companies need to pay attention to the expenses so that they can be used effectively for business continuity.   

What is the operational cost?

The operational cost is a cost that is related to the maintenance and administration of a business for daily needs. The operating cost includes the cost of goods sold (COGS).    Aside from COGS, operating costs also include the other operating expenses that are often called selling, general, and administrative (SG & A).  Those three cover rent, payroll, overhead cost, as well as raw materials and other maintenance costs.   On the other hand, non-operational costs include interest, investments, and foreign currency translation. You can calculate the operational cost from adding product selling costs and operating expenses.   In addition to that, the profit and loss reports of companies can also provide us with the company’s operational cost as well. When creating a company’s bookkeeping, they need to take note of operational activity and costs related to the company’s non-operating activity.     Those two will be recorded differently and allow analysis to determine whether the activity contributes to revenue and is efficient.    Generally, company management will maximize the profit. The profit itself can be determined by revenue and the total expenditure issued by the company for its operation.     Increasing profit can be performed by increasing the revenue or lowering the operational cost. Sometimes, cutting the cost is easier to do in order to escalate the profit.   However, cutting the cost excessively can reduce company productivity. Lowering costs can also affect a company’s performance, which is why they need to do it carefully.   For instance, if companies cut their advertising costs, their short-term profits will increase. However, lowering the cost may adversely affect a company’s ability to reach new customers and new businesses.   That being said, a company needs to think thoroughly about short-term and long-term profit and then choose which one will be the best for the company.   

The types of operational cost

Mainly, operational costs are divided into two categories, there are fixed costs and variable costs. Fixed costs have the same amount, while variable costs differ depending on the production level. Here are the detailed explanations regarding the types of operating costs.   

1. Fixed costs

Fixed costs are costs that can not be changed even though the level of product or services changes. This means that the cost value is in a constant position although the volume of output is lowering or increasing.    Fixed costs need to be determined in order to run business operations. The determination can be based on contract agreements or cost schedules.    Examples of fixed costs are salary, building rent, depreciation, internet expenses, insurance, property taxes, and certain tools.    The fixed cost of a unit can be lowered by producing large quantities of a product allowing fixed cost to contribute on the economic scale. The fixed cost includes direct fixed cost and indirect fixed cost.   Direct fixed cost can be in the form of direct labor cost or rent, while indirect fixed cost is depreciation. The fixed cost on the balance sheet shows short-term or long-term liabilities, meanwhile fixed cost that has to be paid cash shows on the cash flow report.   

2. Variable cost

Variable cost refers to a cost that is altered depending on the changes in output levels. This means the variable costs can increase or decrease along with the changes in production level.    Variable costs will increase if production levels also increase. Otherwise, if the output level decreases, then the cost will decrease as well. Several of the variable costs are raw material cost, utility cost, direct labor cost, sales commission, and so on.   From time to time, companies will offer customers a discount or cut the price when they buy in bulk. The discount can lower the correlation between production increment or decrement with the company’s operational cost.     3. Semi-variable cost Besides fixed cost and variable cost, there are operations called semi-variable cost. This cost is a combination between fixed and variable. Semi-variable costs vary along with production increment and decrement.    However, this cost will be there even with no production. Semi-variable cost includes overtime wages. The wages are considered as a semi-variable cost since it is adjusted with the total of overtime hours.    Generally, operational costs increase when production increases and vice versa. When the salary is paid based on a productivity condition that allows over time, those costs will have fixed and variable components.   

Overhead Cost is Important Factor in Business Operations

Overhead cost is the whole of the operation cost that is unrelated to the product or services process. Some of the overhead costs are office rent expenses, office electricity expenses, or employee salaries.    Overhead costs are also divided into fixed costs, variable costs, and semi-variable costs. These types are crucial for monitoring overhead costs since they have an indirect relationship with revenue.   The excessive overhead costs will have a negative effect on the business if companies don’t control them. For example, a small business doesn’t have to rent an expensive and large office.  It is best to adjust the rental cost with business scales.    It is possible for companies to rent an affordable office, especially if it does not affect the company’s performance. Aside from overhead costs, there is also equipment operation cost.    When equipment operation cost is used to produce products, then the costs incurred are referred to as equipment operating costs. This cost depends on the operation period, machine condition, or the type of equipment.   Examples of equipment operation costs are fuel expenses, maintenance, insurance, equipment depreciation, employee wages, raw material, and more.   The machine or equipment that is used to produce a product needs an operator to operate it. As a result, these expenses are included in equipment operation expenses. This also covers normal wages, bonuses, and so on.   Overhead costs and equipment operating costs are part of operating costs. It has many types and components that need to be paid attention to.    Companies not only pay attention to operation costs but also other costs related to companies’ existence.  A company can maximize profits by controlling costs appropriately.   

Reduce Company’s Operational Cost with LOKASI Intelligence 

It is the desire of every company and business to succeed in cutting operating costs as it allows companies to gain more profit than before. When companies have high operating costs and low revenues, they are at risk of loss or even closure.    Operational costs can be reduced by having a deep understanding of customers or harnessing digital customer intelligence.    This digital customer intelligence includes customer behavior such as people’s origin, people’s interests, what kind of product they like to purchase, and more.   A direct-to-customer business model is a business strategy that uses digital customer intelligence. Apple, for instance, uses customer data to deliver its products directly to its customers without opening a physical store in every country; as a result, the company is able to reduce the cost of opening a store.   If digital customer intelligence is combined with LOKASI Intelligence, maximum results will be generated.   LOKASI Intelligence allows companies to perform customer profiling, identify customer interest, customer movement, lifestyle, and customer origin.   Find out more about how we assist businesses to develop their companies by contacting [email protected] or WhatsApp at 087777977731.          
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