Can you point your business 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 meaningful results. Any business owner knows you need to make numerous decisions and adjustments along the way — whether around pricing, products, personnel, expansions, etc.
What data does your business rely on for the range of factors and questions that impact your financial results? One major way to empower and inform your business’s decision-making is through cost accounting.
What Is Cost Accounting?
Cost accounting assesses the production levels and pricing for a business’s products or services. It differs from financial accounting because its reporting is generally only used internally to streamline business operations. Another key difference is that with financial accounting, there are rules and guidelines that must be followed to produce compliant financial statements for external stakeholders, such as stockholders, vendors or lenders. Cost accounting doesn’t have specific guidelines — the systems and reporting mechanisms a company may use are flexible compared to other forms of accounting.
Cost accounting can add great value to your business because it allows you to better understand the following:
- Cost behavior – Cost accounting can help you determine and predict the behavior of costs, should pricing factors change. For example, will the costs increase or stay the same if the production of your product or service goes up or down?
- Competitive Pricing – Once you understand cost behavior, you can adjust your pricing based on the current market or focus your attention and strategy on more profitable items.
- Budgeting – By knowing the real cost of your products and services, you can create more-accurate, more-effective budgets that reflect the current status of your business needs.
Generally, to adequately monitor your company’s costs, you need to 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 and production wages, sales commissions, supplies, and shipping or delivery costs.
By regularly analyzing your business’s fixed and variable costs and better understanding key business factors, such as pricing structure and budgeting, you can gain a clear view of your business’s financial picture. Cost accounting not only helps with financial clarity but also plays a crucial role in your business’s overall decision-making.
The Basis for Robust Business Analytics
Making informed, strategic business decisions requires the use of business analytics. How a business gathers its analytics can vary, but it typically involves collecting, analyzing, summarizing and evaluating various alternative courses of action and using those findings to determine the best outcome based on cost efficiency and capability.
Cost accounting provides better data to make your business analytics more effective. It produces detailed financial information that can 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 and carrying costs, effectively manage your production and operating costs, and more.
Getting started with cost accounting at your business can be a complex and time-consuming project, but it doesn’t need to be if you have relevant financial data in your current accounting system and the right personnel to pull insights from it. Before you begin implementing a cost accounting system, ask yourself and your team what financial measurements or metrics you’d like but don’t have — then develop a plan and a system to measure and report this information.
Not sure where to start? Creative Planning can help. Our team partners with clients to help them get the most out of cost accounting at their business and offers a suite of accounting software options to take your business’s financials to the next level. Contact us today to learn more about our range of accounting services.