When managing your company’s financial life, there are terms that are so scary that our minds start to spin before we even try to understand what they mean.
Cost Accounting is one of them. But don’t worry: it’s not rocket science. In this post, you’ll learn how to understand, identify and organize costs within your company in a simple and practical way.
What is cost accounting?
Let’s understand, first of all, that in order to do cost accounting we have to account for costs. And what is accounting for costs?
Accounting = Recording.
Costs = The money your company spends to produce what will be offered to customers.
And if you still have doubts about what should be taken into account when identifying costs, it is important that you understand the difference between costs, expenses and losses . This way, you can’t go wrong when putting everything on paper and accurately identifying how much is spent to produce your product or service.
Okay, but after accounting for costs, after recording the money your company spends to produce what will be offered to customers, how do you analyze costs and see where we can improve?
Simple: by doing your company’s cost accounting !
Cost accounting = understanding where costs are and how they behave within your company.
But what is cost accounting for?
Quickly and objectively? To help you make decisions, because by better understanding your company’s costs you will have answers to questions such as:
- Am I charging right?
- Is this service worth providing?
- How much did I earn on the last project?
- And many others…
Answering these questions will make it easier to decide whether you can give your client a “little discount,” whether you should increase the price of your product or service, whether you are selling your projects well, and so on. There are many advantages.
How do I identify my company’s costs?
We have already served thousands of companies and one phrase we always hear is:
“I never know what is an expense and what is a cost in my company. Is electricity a cost or not? Is salary a cost or not? Is office supplies a cost or not?”
This is not just your question! It is present in most of the companies we have served, from individual micro-entrepreneurs (MEI) to medium-sized companies.
And do you know why answering it seems so difficult? Because the answer is: it depends! What defines what costs are within a company is what it does and the costing method it uses.
You might be thinking, “ Oh my God, here comes another one of those scary terms (again) coming at us. ” But don’t worry, this one is easy.
– What is the costing method?
Costing method is nothing more than the way your company understands what a cost is. There are several costing methods, but that is not important now.
Going back to “it depends”, there is a key question to identify costs. Whenever an expense occurs, ask yourself:
- Was this expense used to produce what I am selling?
If so, it is probably a cost. If not, it is an expense. - But if you still have doubts, ask yourself:
- If I don’t have this expense, can I produce what I sell ?
If the answer is no, this is definitely a cost. - And that’s where the dependency comes in…
Let’s imagine 3 types of companies: a company that makes websites, a company that sells photocopies and a company that sells consulting services.
Each of them can answer the same question differently.
For example, in the case of electricity:
For the company that makes websites the question would be: Was electricity used to produce my websites? If I don’t have electricity, can I produce my websites?
For the company that sells photocopies the question would be: Was electricity used to produce my photocopies? If I do not have electricity, can I produce my photocopies?
For the company that sells consultancy, the question would be: Was electricity used to provide my consultancy? If I don’t have electricity, can I provide my consultancy?
This can be so precise that even agencies of the identical industry may additionally have a special answer to this.
For instance, lets say two groups that specialize in internet site development. One of them develops all its tasks within the workplace, even as the opposite outsources the development of its initiatives to freelance professionals.
In the first case, the organisation may also treat electricity as a price, however inside the 2nd, it can’t.
This is due to the fact, inside the first case, the electricity that could be used inside the gadget would be the organization’s own strength. In the second case, the power would be the freelancer’s obligation.