August 27, 2013
One of the first basic accounting areas that a small business management needs to comprehend is cost accounting. Although this is something that many small business owners seldom consider after initially pricing the goods or services offered.
Cost accounting can provide a number of different benchmarks for management to use in the operations of the company. The proper allocation of costs to the different products and services can give an accurate cost of the product or service provided. This cost can be cross referenced against industry gross profit standards to get a price for goods or services.
There are two types of costs to consider when look at products; variable and fixed.
Variable costs are expenses incurred by the business by the volume of activity or production of the company. These costs have a direct correlation with sales; as sales go up so will the variable costs and vice versa. Some examples of variable costs are: costs of goods sold, sales commissions, delivery charges, shipping charges, direct labor to make the goods or perform the service and any other materials necessary to finish the product.
Fixed costs are costs that are necessary to the products that have to be paid regardless of the volume of the products produced. Sales amounts do not change the amount paid for fixed costs. Some examples of fixed costs are overhead (rent and other occupancy costs), salaries and depreciation.
There are some costs, called semi-variable, that have components that are fixed and variable and the costs should be allocated as such. An example of a semi-variable costs is a salary for a sales person that can also be paid commission.
After the costs have been segregated in the different types of costs a breakeven analysis can be prepared. A breakeven analysis will show the relationship between the price of the products, the volume sold and costs and expenses of the product. This can provide invaluable information like the volume of product that needs to be sold to meet a certain amount of profit.
Not only should cost accounting be a major component of how your business practice operates but it should be review and adjusted on a regular basis (how often depends on the industry). Let us help you with any of your cost accounting needs by calling us at (616) 776-6457.
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