Understanding the elements of cost is helpful in having a good understanding of the way costs behave. There are many different elements of cost, around 10, depending on exaclty how the various elements are subdivided.
People. People are an important cost ... they are also an available resource. The accounting of cost for people should be simple ... but it must be done with understanding. Some people get very little by way of remuneration. Others are paid a lot. The amount of the remuneration changes the cost of the work, and the potential for profit. But sometimes good people work for nothing ... and that changes the accounting of cost. TVM does the people cost analysis using standards as well as actuals ... this enables an observer to understand what costs were relative to what they should have been.
Materials. Material cost is part quantity, part unit price and part quality and efficiency. TVM takes all of these things into consideration in the analysis. Changes in unit price tell something about what is happening in the market for the materials. Quantity is a function of how much is done. Quality and efficiency are parameters that reflect reality. TVM is interested not only in what the actual cost is, but how does this compare to what the cost should have been. Price, quality and logistics are all issues that affect the cost of materials.
Facilities and equipment. Equipment may be an important cost. The behavior of cost depends on the work being done and the type of equipment. The cost may be computed in a variety of ways including based on elapsed time or some sort of usage measurement. The capital cost of equipment should not be charged off in total at the time of acquisition but capitalized.
Depreciation. Depreciation is a part of the cost framework. It is a concept that is derived from the economic life of an asset ... and in this context, nothing to do with tax law and allowable write-offs. The aim of depreciation is simply to relate the cost of using an asset to the activities the asset is used for. If an asset has a three year life, and is used most of the time, each of the year periods should be charged one third of the capital cost. This would give a reasonable result. On the other had an piece of equipment may have a life that depends on how much it is used (for example, an aircraft) ... say it will be useful for 50,000 hours of use. In this case the hourly cost can be computed and the asset charged to the activity for each hour it is used, and offset against the depreciation provision for the asset.
Operating expenses. There are many costs that must be incurred to run a business that produces goods or services. They range from purchase of utility services like electricity, water and sewer to items like the maintenance supplies and services for the factory, offices and equipment.
Admin and General Overhead. Expenses and overhead may be substantial. They should be costed into activities based on the activity level. TVM analysis helps to clarify what these costs actually are, and how this compares to what the costs should have been.
Financial costs. Financial costs may be significant and therefore costed separately from expenses and overhead. TVM analysis addresses all aspects of financial costs, including issues like the impact of exchange rate fluctuations.
Profit as a cost. The cost of profit may also be substantial. In the for profit world the earning of profit is the primary job ... and this becomes a cost of the product. TVM captures this in its analysis and helps to explain profit behavior in complex communities and organizations.
Value Consumption. Unaccounted for consumption of social value
Cost of external constraints and inefficiency