SPEAKING THE LANGUAGE OF PROCUREMENT – MINI SERIES Post 2: Categorisation of business costs

Following on from my introduction last week, we know that the word “Procurement” can instantly put up barriers. “Ohhhh” they say when I say I provide Procurement training “that sounds interesting…but what do you ACTUALLY do?” I always thought that if I could explain to my mother what I did as a procurement director that I’d cracked it, sadly this went down like a lead balloon. Trying to find the language such as business shopping did not do the procurement profession any justice or sadly achieve success with my mum. So, this series aims to break down the word Procurement and look at what components make up this mysterious term. Let’s start with the categorisation of business costs.

The categorisation of business costs is to segment and analyse operating costs within a business. It’s a complete and transparent idea of separation of expenses in various sectors such as manufacturing cost, product cost, sunk cost, variable cost, direct cost, and indirect cost etc. This gives procurement a better understanding of what the company buys and who in our business uses the goods or services. This applies to both direct or indirect spend .

Categorisation can further segment our costs into families with related sub-assemblies that make our spend clearer and give us close visibility on the volumes. We can also look at total costs of labour and profit charged by a supplier. Looking at the history of our spend is helpful although past performance is not always a predictor of the future success.

Companies are vitally interested in measuring their costs. Many types of costs are observable and easily quantifiable. In such cases there is a direct relationship between cost of input and quantity of output. Other types of costs must be estimated or allocated. That is, the relationship between costs of input and units of output may not be directly observable or quantifiable. In the delivery of services, for example, the quality of the output is usually more significant than the quantity, and output cannot simply be measured in terms of the number of patients treated or students taught. In such instances where qualitative factors play an important role in measuring output, there is no direct relationship between costs incurred and output achieved.

Therefore, costs can have different relationships to output. Costs also are used in different business applications, such as financial accounting, cost accounting, budgeting, capital budgeting, and valuation. Consequently, there are different ways of categorizing costs according to their relationship to output as well as according to the context in which they are used.

By analysing all of this it creates a map and strategies to move forward, allowing companies too look at the value of what they are purchasing, whether that be mugs for the office kitchen or maintenance for the plants in reception. A proper knowledge of classifications of costs mandatory for increasing development of a company perfectly.

For more information on Categorisation of business costs, get in touch and we can tailor make a bespoke training course on consultation package to assist you and your team.

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