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 decisions and adjustments along the way – decisions about pricing, products, personnel, expansion and so on.
What information do you have to rely on for the array of questions that impact your financial results? One way to improve your decisions is by access to information through a robust cost accounting system.
Cost Accounting Helps You Make Informed Decisions
Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Cost accounting differs from financial accounting because its reporting is generally only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders, vendors or lenders, it must follow a specific set of accounting rules and guidelines. Cost accounting does not, it is designed to get you information to help you understand and manage your business. The most important aspect is the information must be relevant for a particular situation and measure a product, process or service on a consistent basis. Therefore, you have flexibility in how you design your cost accounting and reporting system.
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 or service goes up?
- Appropriate prices for your goods or services. Once you understand cost behavior, you can adjust your pricing based on the current market or focus on the more profitable items.
- You can create more effective budgets if you know the real costs of the final product or your service.
To monitor your company’s costs with this method, you need to pay attention, measure and allocate the two types of costs in your business: fixed and variable.
Fixed costs don’t fluctuate with changes in production or sales. They include costs such as rent, insurance, dues, subscriptions, leases, loan payments and management or office salaries.
Variable costs do change with variations in production and sales. Variable costs include raw materials, hourly & production wages, sales commissions, supplies and shipping or delivery costs.
Developing a robust cost accounting system can be a complex and time consuming project but doesn’t necessarily need to be if you have appropriate and relevant information in your current system. The extent and complexity of a cost accounting system is completely based on the unique aspects of the company and management’s needs. We have seen the benefits of this will normally exceed the investment in a system, if it is designed properly.
Create a Financial Reporting System that Impacts Your Success
If you’d like to better understand the ins and outs of your business and have sound guidance for internal decision making, you should consider implementing a cost accounting system for your business.
This will help you evaluate your business from top to bottom and determine the real cost of each component or service to a customer, the cost of future expansion or retraction and the potential profits for your business. With these measurements, you can prepare better budgets, adjust pricing with confidence, keep inventory at appropriate levels to save space & carrying costs and effectively manage your production & operating costs to note some of the benefits.
To enhance or get started developing a cost accounting system ask yourself and your team what financial measurements would you like but do not have? Then develop a plan and a system to measure and report this information. We would be pleased to help you identify and develop a cost accounting system to enable you to make better decisions. Start Here.
ABOUT THE AUTHOR
Gene Garrelts, CPA, CFP®
As Market Leader, Gene is responsible for growing overall service for the Omaha market by managing all aspects of the value creation cycle and will work with the Omaha team to ensure a wow experience is being delivered.
Gene has spent his entire career in public accounting, initially with a national firm, then as part of a small group that started a new firm with only a handful of people. He specializes in real estate and construction, professional services and government entities.