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 positive results. Any business owner knows you need to make numerous adjustments along the way. For example, there are 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 determines and reports 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 statements 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:
1. Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?
2. Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.
3. Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.
Is It Difficult?
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:
• Dues and subscriptions
• Equipment leases
• Payments on loans
• Management salaries
Variable costs do change with variations in service and sales. Those costs include:
• Raw materials
• Hourly wages and commissions
• 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.
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.