What is cost accounting?
Cost accounting is a type of managerial accounting that sets out to determine a company’s total cost of production. This method looks at the costs of each step of production, such as labor or raw materials, as well as fixed costs, such as lease costs and bills. Cost accounting is beneficial to the executive team of a business, as it provides full visibility to make business decisions. And, unlike financial accounting, cost accounting does not need to follow strict standards, meaning a business’ processes can be more flexible to meet the company needs.
Cost accounting allows the business owner to know which product, job, or service has the largest margin, all of the costs associated with production at each step of the process, which inventory moves slowly or quickly, and whether or not their pricing models are optimal. In other words, cost accounting procedures provide the necessary visibility for a company to maintain its profitability.
Though cost accounting is often the driving factor of a business, many business owners neglect this aspect of their finances. Why? Cost accounting entails tedious, complex work. The exact process that the accounting team follows will vary based on industry and business type—not to mention, it may involve a lot of initial guesswork. On top of that, many businesses do not have the right systems and processes in place to be able to efficiently track inventory or analyze their pricing. If, for example, you manage a team that doesn’t have an efficient system in which to log their time and expenses, you may be flying blind when setting a profitable price point for your services.
What are the benefits?
The investment is well worth the effort, however. Accurate cost accounting can bring multiple benefits to a company, as it allows the business to:
- Better estimate costs throughout the process
- Be more competitive with cost-cutters in the industry
- Identify mistakes earlier on
- Adapt its pricing models to stay profitable
A construction business, for example, would want to know how many hours a job will take, the labor and materials needed, and how that information can be used to determine the estimate for a job. Or, a distributor that sells multiple products would want to know not only that they’re making money, but which products are making the business money. And, while cost accounting is commonly used in industries that create products or need job costing—such as construction and manufacturing—every type of business can benefit from implementing cost accounting processes.
Should I outsource accounting support?
Cost accounting involves a significant amount of moving parts and guesswork, especially when considering supply chain disruptions, increases of material and labor costs, or reporting errors. Not to mention, the process becomes more complicated with a greater amount of inventory, employees, or services offered. The payoff of having cost accounting processes in place isn’t negligible, though, and may well be worth bringing in additional support.
One of NOW CFO’s core service offerings is implementing effective cost accounting procedures in order to quantify the cost associated with any type of operation, product, or service. We have vast experience in job costing, inventory analysis, data gathering, lower of cost or market analysis, and multiple inventory systems and methodologies. If you feel like your business could use additional visibility into your costing, outsourcing this piece of your accounting can be highly beneficial to the financial health of your business.
