The old saying goes, “business isn’t personal” – not because people aren’t involved in business, but because everybody knows the end goal of a business is to maximize profits. But how does a firm maximize profits? The first step is to analyze the finances of your company, a process known as cost accounting. Cost accounting is so vital to the success of a business, because it allows decision-makers to pinpoint the areas the company is profitable to make the most informed business decisions.
Cost accounting attempts to capture the total cost of production of a company. In order to understand how cost accounting does this, it is important to first break down the different types of costing that go into accounting. The two biggest costs are fixed costs and variable costs. Fixed costs are costs that are stable and do not change with production levels. Examples of these costs include rent, and equipment leases. On the other hand, variable costs, as the name suggests, are tied to a company’s level of production. For example, an increase in snowfall might cause a salt company to increase production, thereby increasing the variable costs of producing those extra bags of salt.
There are, however, other factors that influence cost accounting that can help a company identify the profitability of their products, as well as how to best plan their product to achieve their business goals. Let’s take an example of a winter-goods company that sells coats, hats, skis, and other winter-related products as a basis to understand the factors of cost accounting. The first important consideration is sales volume, or the number of units sold within a reporting period. This can be an important indicator of the success of individual products and the business as a whole. But it can also reflect seasonal changes in demand from consumers. For instance, during the summer our winter-goods store would report a very small sales volume in comparison to the winter months. The next factor is production. For our store, this would entail the costs of producing products, as well as the price of the materials that are involved in production. Next, is labor costs. In the winter, our store may see increased traffic. But while an increase in traffic likely means an increase in sales, it also means an increase in the number of labor hours our business will have to pay. Finally, material and market considerations are the last factors to consider. The available materials and their price will affect the business decisions our store makes. If the price of wool rises, we might need to find a new material to make hats with, or simply make the decision to not produce any hats. The market for hats would help us make this determination. If our numbers indicate there is market share available for us in the hat market, we would surely produce. Ultimately, these factors, along with the fixed and variable costs of an organization can help It make the best decisions regarding profitability and production. Now that we all understand what cost accounting is, and how it is a crucial tool for businesses to make decisions, it may seem overwhelming. After all, how are you expected to run a successful business and manage the complexities of accounting? Luckily, professional accounting firms can help any size company reap the benefits from accounting. Firms like Andrews Datax Inc. can provide a variety of services aimed at making your business the best it can be. Their team of dedicated professionals work hard to guide clients and align their strategic goals to maximize profits. Looking to take your business to the next level? Consider improving your accounting and see where your profits are hiding.
By Reid Arnold