Costs and income of enterprises

Plan

Introduction

1 Economic essence of costs and income of enterprises

Resources of income for enterprises

Income allocation

Types of costs

2 Main ways of decreasing the costs Main ways of increasing the income

Conclusion

The list of used literature

Introduction

Any company or organization, regardless of ownership (private or public) in the implementation of its activities receives some income. The relevance of this topic is that in conditions of market relations incomes of enterprises and organizations have direct relevance to the budgetary system of the Republic of Kazakhstan.

The purpose of this paper is to explore the nature of income and costs.

The methodological basis was: Internet information sources, the book of domestic author.

Kazakhstan economy is market type of economy. Kazakhstan was the first country among CIS that received a status of country having market economy from the Ministry of Trade, USA. In 2000 this fact was confirmed also by European Union.

The economy started to change since 1991 after the collapse of Soviet Union. In 1990s many banks gave loans to people and organizations without knowing how to receive them back and according to what conditions it should be done. Today the situation is completely different: they know how to deal with loans business but there is no high demand especially after everybody felt the financial crisis and the crisis in construction sphere. Nowadays many enterprises pay special attention to the analysis of income and expenditure and their comprehensive characterization as many of the business people understood the importance of making, keeping and proper spending of money. Consideration of this issue is essential for the proper functioning of enterprises and organizations subordinated to the market laws. Right management decisions can be made only on the basis of clear understanding of income and costs question. Making the right decisions will lead the enterprise to financial independence and prosperity.

This paper gives information about resources of income, income allocation and types of costs in the section of “Economic essence of costs and income of enterprises”. It may be useful for entrepreneurs of small and medium enterprises, students of economic and financial departments of universities and colleges.

The problems of profit maximization and costs minimization are also considered in this paper. These topics are always very topical, because the main target of any enterprise is to maximize profit. How to do it? One of the ways is minimization of costs. Strive to minimize costs - not to act against the interests of business for avoiding costs. This should be solved by finding the best possible optimal ratio of revenues and expenses. The ways to minimize costs are given in the “Main ways of decreasing the costs” section.

Another topicality of this paper is the fact that income and costs (besides the financial results such as profit and expenditures) are the most important indexes of the enterprise’s activity and main elements in the report about financial results. Financial results of the enterprise are found by comparing income and corresponded costs. That is why a proper understanding of income allocation and what types of costs there are, is crucial for the successful management of the enterprise.

1 Economic essence of costs and income of enterprises

Any enterprise’s target is to make profit. In order to make it a company should understand where comes from the income and where goes out costs. Knowing the resources of income and types of costs will allow the enterprise to manage them successfully, which means it will be able to make profits. Companies and enterprises in different fields are part of whole economy. Active and profitable companies rise economic activity and contribute to the development of national economy. Big companies become bridges between countries and states.

Any enterprise has to have a system of accounting, managing and planning of costs and resources to finance its activities. Systems are constructed on the basis of income and costs.

Resources of income for enterprises

To define resources of income for enterprise all activities should be divided into:

- main and operational activities (production and selling products and services);

- financial activity (taking loans and giving them to other enterprises; enterprises’ taking part in activities of other companies; operations of enterprise on the financial markets, differences in exchange rates etc);

- extraordinary items (operations that are not usual to activities of the enterprise).

This division of activities is very important as it allows to define what part of income was received from main activity, what part was received from other sources such as those that are unusual for a particular enterprise’s activities and cannot be considered as some constant source of income.

So, in the system of financial management it is required to have following rates indexes:

Income and profit indexes:

a) net income from selling of products (providing services) – is gross revenue from sales minus value added tax, excise tax, returned products and price discounts. This index is the real base for further counting of profit index and evaluation of profitability;

b) gross profit from sales – net income from sales minus production expenditures of sold goods.

This index allows to analyze the effectiveness of production activity of the enterprise;

c) profit (loss) from main activity (operational profit or operational loss) – gross profit from sales minus management costs and sales costs. This index reflects the influence of management and sales costs to financial sales result;

d) profit from financial activity – balance of income and cost in hand by financial activity. This index is needed for defining the profit from production and economic operations including such sources of profit as receiving interest and dividends, operations with foreign currency etc.

e) profit from ordinary economic operations – sum of profits from main economic operations and profit from financial activity;

f) extraordinary profit;

g) profit (loss) before taxes. This index is the point from which the accounting profit transmits into taxable profit.

Accounting (or reported) profit – is the profit, which was counted in accordance with requirements of book keeping. Main target is to define the accounting profit – to show the effectiveness of enterprise’s activities for reported period.

Book keeping is made for gathering and analyzing information about income and costs of the enterprise and about net result of activities for making management decisions in future periods. After the target was achieved the result (profit before taxes) should be adjusted in accordance with tax law of the country. So, the taxable profit is accounting profit, that was recounted in accordance with tax law requirements;

h) net profit (net loss) – profit after taxes. In conditions of market economy it is the most important index of enterprise’s activity. This index is always at the center of attention for managers and financial markets. The existence of the enterprise, working places for its employees, paying the dividends are depended on dynamics of net profit (http://www.bestreferat.ru/referat-68599.html).

Income allocation

 

The rights and opportunities of allocation and using of the income are very important for any enterprise because income is the main source of financial, production and social development, financial development of its employees.

The system of income allocation and utilization should stimulate further development of current particular type of business and expansion to new directions. It should also increase the interest for making more money

The order for income allocation and utilization for commercial enterprise are defined by the methodology of income that is accepted in particular society at this stage of its development

Current order of income allocation corresponds to current stage of market relations development, thus an enterprise should take part in forming the state budget. The rest part of the income should be allocated between owners and investors of the enterprise. If there were other financial resources the income should be allocated between them either in accordance with concluded agreements.

State influence on the choice of directions of net profits is made through taxes, tax exemptions, and economic sanctions.

Such system of income allocation began in 1964 in the Soviet Union. The system passed through three stages of development. The essence of the reform of income allocation is an ongoing decentralization of exemption of enterprise income in favor of the state and reduction of financing enterprises from the state budget. The current system of income distribution or allocation of domestic enterprises began to perform the same function as was adopted in developed countries in the West.

Thus, the transition to a market economy in Kazakhstan the system of income assigning focuses on the current overseas system.

Common to all businesses regardless of ownership and types of activity is the distribution of profits in accordance with the statute and the collective agreement for the following purposes:

1) payments to the budget;

2) contributions to the non-budgetary funds established by a decision of the Government or local authorities;

3) the formation of the accumulation fund;

4) establishment of a fund of consumption;

5) charitable purposes;

6) other purposes (saving for the purchase of property, etc.).

In Kazakhstan there are following taxes:

a) corporate tax

b)value added tax;

c) excises and other taxes.

The list and the method of calculating taxes is subject to change by legislation.

Net income of the company after taxes and deductions (entrepreneurial income) is used to form:

Development Fund (accumulation fund), which corresponds to the growth of fixed and floating assets of the enterprise (capital gains);

Stock consumption (to increase the material interest of employees to improve efficiency and profitability of the enterprise);

Contingency fund designed to finance unforeseen costs associated with the risk of economic activity, other funds, if any founding documents, laws and requirements of practice.

The size of the funds is not strictly regulated, except for certain areas of their use.

Accumulation fund and the fund of consumption - a special purpose funds. They are formed, if foundation documents mention this. The accumulation fund is created to finance the production development of enterprises: financing of capital investments, expansion and reconstruction of enterprises, to finance new development, to pay off loans and interest thereon, for the maintenance of facilities for cultural and educational work and others. Thus, the accumulation fund is a source for entities, accumulating earnings and other sources to create a new property, the acquisition of fixed assets, working capital, etc. The accumulation fund indicates a growing wealth of the company, extending its own funds.

Consumption fund - the source of funds that were saved for implementation of social development (excluding capital expenditures) and financial incentives for personnel. The consumption fund is directed to the following objectives:

- the payment of lump-sum compensation for work results at the end of the year;

- for benefits;

- to pay for transport;

- to grant interest-free loans;

- to establish entitlements to pensions of working pensioners;

- one-time incentives for employees;

- establishment of labor and social benefits;

- the payment of dividends on securities.

Reserve fund is created by an enterprise in case of termination of its activities to cover accounts payable. It is mandatory for joint stock companies, cooperatives, associations, enterprises with foreign investment. The company in addition to the reserve fund shall transfer the share premium, ie, the amount of the difference between the sale and the nominal value of shares, the proceeds of their implementation at a price higher than face value. This amount is not subject to the use and distribution, except the cases when shares are sold at a price below face value.

Contingency fund of joint stock company is used to pay interest on bonds, dividends on preferred shares, in case of insufficient net income for these purposes.

Planning the distribution of profits is carried out in two stages:

On the first the need of profit is determined by the following directions of its use:

a) to finance the development of material and technical base - the advance of capital. The need for profit in this area is determined on the basis of expert evaluation of requirements for equipment modernization, taking into account other sources of funding

b) to finance the growth of own revolving funds - advancing its own working capital. Calculation of the need for additional working capital may be made by technical and economic calculations or by direct calculation on the basis of data on the availability of working capital at the beginning of the planning period, projected growth rates of turnover, taking into account changes in the participation of its own funds to pay for goods and trade in shares credited to total value.

c) for the establishment of financial reserves. The need for financial reserves is defined in two ways: either as a percentage of net profit specified in the constituent documents, or on the basis of financial need due to growth and expansion of business activity.

d) for repayment of long-term and medium-term bank loans and paying interest on them. The need for these resources is determined by the contract and terms of obtaining and repayment of these loans;

e) to pay off other types of credit obligations of the enterprise (bonds) and interest payments on them;

f) use the profit for the acquisition of credit obligations, shares of other companies is mainly determined by an expert selected by the light of targets in the development of the enterprise (flow of capital into other forms of economy, market expansion, etc.);

g) for financing of unions, associations, corporations and other horizontal structures, which is a member of the enterprise. The need for profits for these purposes is determined by the contract and the charter of all these structures, either as a percentage of profits or volume of goods turnover, either in absolute amount;

h) for social enterprise development and improving material incentives, taking into account the needs of social, cultural, housing events and its cost. Increase of material incentives is possible by adopting the principle of participation in profits;

i) to ensure compliance with tax obligations to the state;

j) to pay dividends (if such costs are mentioned in the foundation documents). The economic basis for this payment of dividends on stocks and bonds, except shares of a joint stock company, according to many experts, is that owners play roles of creditors of the of the enterprise and should receive a portion of profits as dividends, which corresponds to the cost of debt capital on the markets of production factors (the lower limit ) or equal to the additional profits earned by the enterprise-borrower from the use of additional capital in the planning period in proportion to the share capital in the total amount of the funds (upper limit).

The second step compares the amount of demand for income in all areas of its use with a capacity of enterprises to receive it.

Total demand for profits by the above mentioned directions of its use is one of the variants of the value of the target company's profit.

Final decisions on the planned uses of profits made after the profit plan taking into account the potential to receive it.

Each company produces an annual plan and budget estimates of the actual use of the accumulation fund and the consumption fund. Each of these estimates show balance the flow of funds in the financial year, expenditure on specific areas, the balance at the beginning of a future period. The actual performance of the estimates is analyzed with planned developments.

Retained earnings of previous years may be directed towards replenishment of the reserve fund, to increase the authorized capital, to increase funds for special purposes (to purchase the property, etc.) (http://www.xserver.ru/user/pkpri/5.shtml).

 

Types of costs

 

Production of any commodity is a cost of economic resources - raw materials, fuel, energy, labor, transportation and other services. Payment for all of these resources represents a cost of production. Due to the fact that not all of these resources are actually paid, that is, some of which the company can use as a free, economists distinguish between explicit and implicit costs.

Explicit costs (external accounting) - a cash payment for the resources obtained from (wages, payment for the supply of raw materials, transportation, legal, consulting and other services).

Implicit (internal) costs - are costs associated with the use of enterprise’s own resources. In contrast to the explicit, these costs are not paid, are not reflected in financial statements, they are hidden, ie, they are firm's own resources used in its manufacture. The magnitude of these costs is determined by income, which could bring these resources in their most profitable alternative use. The existence of implicit costs can be illustrated by the activities of the firm or enterprise, which uses owned and rented production facilities, equipment, machines. The company pays for the use of foreign capital rent, which includes interest and depreciation. Since the alternative use of company-owned capital, such as giving it for rent, would have brought in revenue as interest, then the firm must take into account the cost of using own capital. They represent the interest on capital.

There is another point from which costs may be considered. Part of used economic resources may be owned by a firm, owned by their respective owners. Another part of the resources the firm acquires from suppliers who are not owners of the firm. Thus, firm may have production facilities and equipment, vehicles, etc. At the same time, the company buys raw materials, fuel, energy, labor services, etc. Using any resource entails costs. Costs for use of own land is called rent, or internal rent, the costs of using entrepreneurial skills of company owner are called the normal profit, costs for use of company-owned industrial buildings, equipment and other items of real capital is called interest.

Thus, economists include into the economic costs of production all costs - internal and external, including rent into internal costs, normal profit and interest in order to attract and use resources in the competitive enterprise. Accounting costs are equal to the total external costs. From these definitions it follows that the economic costs are bigger than accounting costs for the amount of internal costs of the firm.

Accounting department registers production costs. The accountant records the actual costs that have occurred in the last period, determines the actual total costs in cash. If the production costs include only explicit costs, then their sum can be understated, and the difference between the proceeds from sales and explicit costs will be overstated.

Sunk costs (may be also referred as Fixed costs). There are also so-called sunk costs, which the company has spent, but won’t be able to recover. Sunk costs do not influence the firm’s decision-making on actions in future. But we can estimate the previous decisions that led to the emergence of sunk costs.

The volume of total cost of firm varies depending on the output Q. If the output increases, then total costs increase also. If production reduces, company’s costs also reduce.

The amount of some types of costs remains constant, independent of production volume. Fee for leased space, equipment, other costs remain constant, no matter how varies the production volume. The firm’s costs, the amount of which does not depend on the volume of output, called the fixed costs (FC).

At the same time, the costs of materials, fuel, energy, salaries and other change along with the output. If the production output stops, then such costs reduce almost to zero. With the growth of production variable costs increase, while the total value of fixed costs remains unchanged. Costs of production, the magnitude of which depends on the volume of output, called the variable (VC) cost of the firm. Total (TC), or gross, the cost to the company equal to the sum of fixed and variable costs: TC = FC + VC. Fig. 1 shows the line of fixed costs, variable costs and total costs curves. These forms of curves have most of the firms.

Fig. 1. Constant, variable and total costs of firm

So, there are:

Fixed costs:

Costs that don't change over a period of time and don't vary with output. E.g. salaries, rent, tax, insurance, heating and lighting. Fixed costs can also be called indirect costs as they are not directly associated with the final product. Fixed costs have to be paid even if the company is not producing any goods.

Variable costs:

Costs that vary directly with output so when output increases, variable costs also increase. E.g. raw materials, electricity. Variable costs can also be called direct costs as they are directly associated with production.

Semi-variable costs:

These costs have fixed and variable elements. E.g. a person working for the company may have a fixed salary but may also earn commission on sales.

Total costs are calculated by adding together fixed, variable and semi-variable costs.