Can you point your
company in the direction of financial success, step on the gas, and then sit
back and wait to arrive at your destination?
Not quite. You can't
let your business run on autopilot and expect good results. Any business owner
knows you need to make numerous adjustments along the way - decisions about
pricing, hiring, investments, and so on.
So, how do you
handle the array of questions facing you?
One way is through
cost accounting.
Cost Accounting Helps You Make Informed Decisions
Cost accounting
reports and determines the various costs associated with running your business.
With cost accounting, you track the cost of all your business functions - raw
materials, labor, inventory, and overhead, among others.
Note:
Cost accounting differs from financial accounting because it's only used
internally, for decision making. Because financial accounting is employed to
produce financial
planner for external stakeholders, such as stockholders and the
media, it must comply with generally accepted accounting principles (GAAP).
Cost accounting does not.
Cost accounting
allows you to understand the following:
- Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?
- Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.
- Budgeting. You can't create an effective budget if you don't know the real costs of the line items.
Is It Hard?
To monitor your
company's costs with this method, you need to pay attention to the two types of
costs in any business: fixed and variable.
Fixed costs
don't fluctuate with changes in production or sales. They include:
- rent
- insurance
- dues and subscriptions
- equipment leases
- payments on loans
- management salaries
- advertising
Variable costs
DO change with variations in production and sales. Variable costs include:
- raw materials
- hourly wages and commissions
- utilities
- inventory
- office supplies
- packaging, mailing, and shipping costs
Tip: Cost
accounting is easier for smaller, less complicated businesses. The more complex
your business model, the harder it becomes to assign proper values to all the
facets of your company's functioning.
If you'd like to
understand the ins and outs of your business better and create sound guidance
for internal decision making, consider setting up a cost accounting system.
Need Help?
Please call if you
need assistance setting up cost accounting and inventory systems, preparing
budgets, cash flow management or any other matter related to ensuring the
financial success of your business.
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