Costs (or expenses) are an important part of the Profit and Loss (P/L) account in any company. They are the representation of our efforts in a monetary form just like the revenues (turnover) are a representation of the effects we get. For a company to be profitable we need to put in less efforts than the effects we are getting.

If financial accounting (or statutory) is more concerned with the correct booking of all the costs, following the accruals and prudence principles which also involve provisioning and accruing for expenses, performance management (FP&A) has other concerns. Understanding the costs in order to better steer them is one of these concerns.

Out of many approaches possible, two remained as essential and fundamental to understanding our costs base. Separating the costs in fixed and variable is the original one, derived from the basic theories of Economics. A bit different is the grouping of costs in direct (production related) and indirect (or overheads, period related).

Calculating the break even for our company (or any other performance view), calculating the prices of our products and services (price structures), building standard performance management P/L formats to be used in actuals reporting, budgeting and forecasting, business cases and many others are essentially using the costs related knowledge.

Since performance management is drawing information from statutory accounting, which is, as we already said, not interested in separating the costs based on management decision needs, we might have some troubles in real life with transforming financial data contained in accounts into costs information to support decision making.

Statistical functions can help us a lot in linking various types of costs with the corresponding revenue (turnover) stream. You can learn about correlations, Spearman and Pearson functions. Also using Excel might come in handy, offering some native functions to help you in this regard.