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Operational expenses are the normal costs of the business and are tracked by function and cost type.  They are either reported as totals on a per unit (unit cost) basis.

Quick reference

Tracking Operational Expenses

Operational expenses are the normal costs of the business and are tracked by function and cost type.  They are either reported as totals on a per unit (unit cost) basis.

When to Use Operational Expense Tracking

If your business is spending money, you should be tracking the costs.  Typically these are reported monthly by Finance, however with the advances in business ERP systems and Dashboard programs some companies are now tracking these daily.

Instructions

The business finance system collects the costs as they are recorded (the amount and timing based upon the accrual system).  Reports are then generated to show that actual amount of spending. 

  • When budgets are in place, the reports will often compare the actual spending to the budget to calculate variances.  This is covered more in another module.
  • Operational expenses are usually categorized as variable or fixed costs.  The fundamental difference from a cost tracking standpoint is that variable costs are usually reported on a per unit basis and fixed costs are reported as totals.
  • Variable costs are those associated with making products or delivering services.
    • Costs are often tracked at a product unit cost level.  This removes the effect of sales volume on overrun and underrun of production.
    • Increased sales above the forecast will increase the actual costs to produce products because more are needed.  This can lead to a condition of over-spent without being overrun.
    • Sales that are below forecasts appear to have saved money, when it is just a decrease in volume, not in the unit costs.  
    • Costs are often split into categories of material, labor, and variable overhead.  These are discussed in more detail in another module.
  • Fixed costs are the overhead or sustaining costs of running the business.
    • The term “fixed costs” is left over from earlier accounting methods.  The costs are not “fixed.”  Some companies use the terms “base” costs or “overheads.”  Use the term common in your company – these are all the costs that are not variable costs.
    • These will normally be tracked by functional department and by the accounts listed in the chart of accounts. 
    • These are often categorized by cost types such as personnel, supplies, contractors, travel, etc and these categories are tracked across departments to identify trends.

 

Hints and Tips

  • Don’t ignore your cost reports.  You can often get an early warning of problems in the organization.  A small problem will cause an increase in costs as people are trying to solve it.  They may not bring it to management’s attention until it has grown beyond their capability to solve it and by that time the solution may require major effort.
  • Spikes in the cost data usually have a unique root cause.  Investigate to determine the root cause and take actions to prevent or control it.
  • Slow trends in the cost data usually are due to systemic problems.  There is not a single root cause; rather the system or operation has some inherent characteristics that cause the effects.  This type of cost problem normally requires fundamental changes to the organization or process in order to stop the trend.
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  • 00:03 Hi, I'm Ray Sheen.
  • 00:04 I'd like to talk with you now about tracking operational costs and expenses.
  • 00:10 Lets start with what I mean by operational costs.
  • 00:14 For our purposes, I am differentiating these costs from project costs.
  • 00:18 Project costs are often tracked separately and
  • 00:20 I have another module devoted to that topic.
  • 00:23 Operational costs are normally the primary cost of the business.
  • 00:28 These are the costs that most operation managers are tracking.
  • 00:31 In fact the ability to track and
  • 00:32 manage these costs are often considered traits of a good manager.
  • 00:37 In most of these organizations are costs collected in the finance system.
  • 00:41 And reported by department or function.
  • 00:43 Within each department, the costs are further divided.
  • 00:46 Into the sub accounts found in the chart of accounts,
  • 00:48 which was discussed in another module.
  • 00:51 Traditionally, these costs have been reported on a calendar cycle,
  • 00:54 such as monthly or weekly.
  • 00:56 However, with the improvement of ERP systems and dashboard programs.
  • 00:59 Some companies are now tracking these daily.
  • 01:02 These costs are often categorized into two broad categories of variable or fixed.
  • 01:07 Based upon these categories, the costs are either shown on a per unit basis or
  • 01:11 a total basis.
  • 01:13 Let's talk about the variable costs first.
  • 01:16 Variable costs are the type of costs that are recorded as costs of goods sold or
  • 01:20 cogs on the earning statement.
  • 01:22 We cover this in more detail in another module.
  • 01:24 But a quick description of variable costs are the direct material cost.
  • 01:28 Which is the cost of purchased items in the products or
  • 01:30 services that are sold to the customer.
  • 01:33 The direct labor which is the cost of building the physical product or
  • 01:36 performing the service.
  • 01:38 And the manufacturing or variable overhead.
  • 01:40 Which is the cost of the few overhead accounts
  • 01:43 that are directly related to production volume.
  • 01:46 Let's look at the variable costs for a moment.
  • 01:48 Although the earnings statement will only report costs of what actually sold.
  • 01:53 The variable costs tracking in the finance system will
  • 01:55 record the costs of everything that was produced.
  • 01:58 If you make to order, those may be the same.
  • 02:01 If you make to stock, they may be different.
  • 02:04 In your budget there was an assumed sales volume
  • 02:07 which was translated into a production build plan.
  • 02:10 If you have to make more units because sales are up,
  • 02:12 you will spend more than what was budgeted.
  • 02:14 However, we don't want to punish the organization for an overrun.
  • 02:17 Because they had to make more to keep up with demand.
  • 02:20 That is why we normally track these costs on a per unit or unit cost basis.
  • 02:26 There is a cost value calculated for each product line or type of service.
  • 02:30 That way if the sales volume is up or down.
  • 02:32 The company can still determine if the cost of making each unit
  • 02:36 is meeting the estimate or forecast.
  • 02:38 These unit costs will be averaged by day, week, or
  • 02:41 month, depending upon the manufacturing volume.
  • 02:44 If your operation makes the same products in multiple locations.
  • 02:48 Or if you have service departments delivering the same service from multiple
  • 02:51 locations.
  • 02:52 These costs will often be tracked by facility or location also.
  • 02:56 Let's switch now to fixed costs.
  • 02:59 The fixed costs are everything that was in the operational expense portion of our
  • 03:02 earnings statement.
  • 03:03 With the exception of project costs that I discuss in another module.
  • 03:07 The term fixed is leftover from the early days of cost accounting systems.
  • 03:11 These costs are not really fixed.
  • 03:14 They can vary but they don't normally vary based upon production volume.
  • 03:18 Many companies are now using terms.
  • 03:20 Like base costs, overhead costs, sustaining costs or
  • 03:23 administrative costs for this category.
  • 03:25 In most companies the dates for
  • 03:27 fixed costs are recorded based upon the accrual method.
  • 03:30 So this is not the same as cash flow.
  • 03:32 Depending upon your payments and collection practices.
  • 03:35 The actual cash being spent can be very different.
  • 03:38 Fixed costs are tracked by total amounts for
  • 03:41 time period, usually a month or a week.
  • 03:43 These totals are reported by different categories.
  • 03:46 Typical categories are by department and by each account in the chart of accounts.
  • 03:50 But I find it also useful to look at some categories.
  • 03:53 That can cut across departments or a combination of several accounts.
  • 03:57 These include categories like cost type, such as all personnel costs or
  • 04:01 all travel costs.
  • 04:03 Another is costs for business process that may cut across departments.
  • 04:07 Such as customer complaint resolution or failure analysis.
  • 04:10 Finance will also track certain costs with special reporting rules, or
  • 04:14 that are currently hot items.
  • 04:16 Such as investment costs or executive compensation.
  • 04:19 I suggest you look at all the categories.
  • 04:22 Trends are unusual items, may be masked by one method.
  • 04:25 And yet be very obvious with another.
  • 04:30 Tracking the cost of an operation is just good management.
  • 04:33 This information is a reflection of what is actually happening in your operation.

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