Keeping track of income and expenses is essential, even if you don't own a business. And if you do own a business, things get even more complicated. There are paychecks to issue, taxes to track, and subcontractors to pay out. All of these details are a whole lot less challenging when you hire an accountant to oversee them. However, it is still important to know a little bit about accounting yourself. Dig into the articles on this website, and you'll gain a better understanding of accounting principles, what services accountants really offer, and the benefits of hiring these professionals to assist with your finances.
Controlling and reducing costs is one key goal of all accounting. One of the most important ways a business can achieve this goal is through cost accounting. Cost accounting is an area that focuses on determining how much it costs your company to create its products or services and how you can reduce that expense.
Do you think that cost accounting might benefit your business? To learn more about this vital component, here is a brief rundown of the two types of cost accounting and what to expect from each.
Job Order Costing
Job order costing tracks expenses for individual jobs in order to find out what it truly costs to perform this one service or make a single product. This would be an ideal route for any business whose products or services are not interchangeable, take significant time, or are expensive to create.
In a construction business, a job order might be the construction of a single home on a lot. Generally, the company would use a number-based system to identify and track all expenses for this one home — including the raw materials, consumable supplies, inventory usage, equipment time on the lot, and labor.
Job costing helps you take control of expenses as each job progresses. As you track actual expenses, you can make strategic budget decisions to keep the job on time and on budget. You can also use this data to affect future quotes and estimates.
Process costing is a better fit for businesses that produce a lot of the same products or services. If you manufacture 1,000 identical $5 widgets per day, it makes no sense to try tracking the costs of each individual widget. In this case, you could find out how much it costs to make the entire run of 1,000 each day and then divide this amount by the number of units.
Process costing can be used in non-manufacturing situations too. A pet groomer that offers standard packages of fixed, low-dollar services could use it to determine the supplies used, labor dollars, and overhead costs for each package. The goal isn't to identify how much it costs for each client but rather how much each package costs on average.
Because you generally only know the cost of a process once the process is done, this cost method doesn't make immediate changes. It does, though, help you identify weak areas you can change in the future as well as strong points, such as greater ability to buy in bulk in the future.
Where to Learn More
Whether you think that process costing or job order costing would be the best choice, your best place to begin is with an experienced accountant. He or she can help you decide how to track expenses, what expenses to include or focus on, and how to use this data to effect change. Make an appointment today to learn more.
To learn more about how to calculate expenses and increase profits, contact accounting services in your area.