Cost scandal – Definition, what it is and concept

A cost scandal is a measure of the economic performance of a particular product. It allows to establish sales prices appropriate to the production costs and that maximize benefits for each unit sold.

Through a cost scandal every company has the possibility of calculating the cost of a good or service it offers, taking into account the resources used for its preparation.

This measurement will serve to choose a sale price that involves obtaining the highest benefit possible. This happens because really what a scandal offers is information about the real cost of a product for the company that produces it.

The use of cost scandal as a tool for calculating and designing production strategies is very common in sectors such as catering or textiles.

However, its theoretical application is applicable to all types of markets and products.

Practical relevance of the cost scandal

In terms of efficiency and optimization of resources of an organization, the role of a correct cost scandal is basic.

The principle of companies on profit maximization is to achieve optimum production levels and the highest cost effectiveness possible. In that sense, the exhaustive assessment of the products it offers and its measurement in terms of costs it is essential.

That is, every company or corporation has to be methodically aware of the costs in which it concurs and the weight of these on its results in terms of sales.

Example of cost scandal

A simple example of the importance of a cost scandal in any commercial company is observable in bakeries. The scandal of a loaf of bread, standard product of all of them.

In a bread oven, the costs of the personnel used to carry out the activity and the raw materials used in the productive work are usually taken into account (direct costs) On the other hand, other costs related to maintenance, cleaning, energy resources (Indirect costs).

In this case, the following would be taken into account:

  • Personnel costs, derived from the contracted personnel and the expense that the company implies its hiring.
  • Production costs as such, which have to do with the weight or weight of the ingredients used or the raw materials with which it is produced.
  • Other costs, corresponding to the bakery, oven or showcase, administrative expenses for the agency, possible marketing expenses.

Taking into account the usual level of sales of the company, a unit selling price for each loaf of bread that ensures a profit margin per unit.

If a company estimates that these costs quoted for a loaf of bread amount to € 0.10 per unit, it must establish a higher selling price, which implies recovery of the costs used to carry out the economic activity and, additionally, benefit for it.