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How to find alternative costs

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How to find alternative costs

Alternative costs represent the amount of lost profits that can result from the choice of an alternative way of using resources and abandoning other opportunities.

Calculation of alternative costs allows the enterprise manager to make the most profitable decisions and plan the activities of the organization.

Instructions

    1

Make a full cost estimateCost of one manufactured product, work or service. Calculate the received profit or loss of the enterprise at release of a batch of production. Even if the analysis showed that this work will only bring the enterprise a loss, do not rush to abandon its implementation. To begin with, calculate the opportunity cost, taking into account additional input data that affect production.

    2

Calculate the material costs. Analyze the available materials of the enterprise, which it was planned to use to perform the work. Their cost would not be affected in any way by the decision to accept the order, in this connection, it is not necessary to take into account the actual costs of purchasing materials that are already in stock. Calculate the cost of purchasing a similar number of materials, the resulting value will be due to internal reallocation of resources, therefore, refers to the internal alternative costs.

    3

Analyze the expenditure of wages. The external alternative costs include the costs of labor remuneration of employees, which are attracted from the outside for the production of this product, and to the internal ones - the amount of income that the enterprise loses, distracting its employees from previous cases to perform new work. Calculate the commercial costs and production overheads that are generated as a result of the order.

    4

Determine the total amount of alternativeCosts of the enterprise. Calculate the cost of sales of manufactured products. Analyze the values ​​obtained, which will show whether it is profitable for an enterprise to agree to the execution of this order. Calculation of alternative costs helps in planning the activities of the enterprise, as it demonstrates the rationality of using the organization's financial resources for performing certain activities.

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