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 exactly. Your business isn’t the smart car of the future!
Any business owner knows you need to make numerous adjustments along the way – decisions about price points, HR, equipment purchases, and so on.
As a small business owner your number one goal is to make a profit.
You do this by using proper bookkeeping techniques to keep a close eye on the expense of producing your product or service and adjusting your selling price to keep an acceptable level of profitability. Using cost accounting will help you make educated decisions about your business, specifically if you should change the price of your product/service or costs to end with the desired amount of profitability.
Cost accounting basics include capturing costs, organizing these costs and reporting these costs. Seems simple, right? It can be a bit more complicated than that. By using cost accounting, you track the cost of all your business functions – raw materials, labor, inventory, and overhead, among others.
Cost accounting allows you to understand the following:
- Cost behavior. One of the critical steps in decision-making is the estimation of costs to be incurred for the particular decision to be made. To be able to do this, management must have a good idea as to how costs “behave” at different levels of operations; i.e., will the cost increase if production increases or will the cost remain the same?
- Appropriate prices for your goods or services. Once you understand cost behavior, you can change your pricing based on current market conditions. Prices are typically set in these competitive markets by the laws of supply and demand. However, if a company manufactures a custom product, or if the company has a patent to its product, then the company can set its own price.
- Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.
Is it hard to figure this stuff out?
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 DO NOT fluctuate with changes in production or sales. They include:
- rent
- insurance
- dues and subscriptions
- equipment leases
- loan payments
- officer salaries
- advertising expenses
Variable costs DO change with variations in production and sales. Variable costs include:
- raw materials
- hourly wages and commissions
- utilities
- inventory
- office supplies
- shipping costs
Note: Cost accounting differs from standardized financial accounting because it’s only used internally to help make decisions. Cost accounting does not comply with generally accepted accounting principles (GAAP) like financial accounting does.
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 better understand the ins and outs of your business and create sound guidance for internal decision making, you might consider cost accounting.
And we can help. Allow Park City Bookkeepers to evaluate your business from top to bottom and determine the real cost of each component. With that as a foundation, we can help you draft budgets, adjust pricing, keep an appropriate level of inventory, and much more. Give us a call today.