The business landscape is becoming increasingly complex and competitive. Each business seeks to differentiate itself through unique offerings and innovative pricing while improving profitability. As a business owner, there are some facets you can’t control and some you can control, including cost. You can effectively control cost and quality when you open your first office, branch, store, or factory. Cost control could be as simple as analyzing a few financial reports in a small setup. However, the challenge comes when you expand rapidly. It is easy to lose track of costs and go over budget.

As your business grows in scale and complexity, it becomes even more important to monitor costs. Even a $1 wastage, when multiplied into thousands and millions, can make a big difference to your profits. At this point, financial accounting alone may not suffice. You may need a comprehensive accounting of each aspect of your cost to cut wastage and price your offerings competitively.

Take a simple scenario. You visit a café to buy coffee. Two cafes serve equally good coffee, but one charges you $1 less than the other. Whom would you prefer? Cost accounting can help you be in an advantageous position, indirectly affecting your revenue.

What is Cost Accounting?

Cost accounting measures the actual cost of production by accounting for the fixed and variable costs at every step of production. Suppose you are a coffee shop. Cost accounting will go into detail and give you a break-up of the cost of ingredients, staff salary, fixed overheads – electricity, machinery repairs, rent, and logistics – and add them to help you identify the actual cost of one cup of coffee.

Identify the actual cost: The accountant will first understand your business and the process, inspect the expenditures of internal departments, and identify factors that can affect the cost—such as changes in raw material prices, regulatory changes, tax laws, and product demand—to arrive at the current cost.

Estimate costs: The accountant will then estimate the project price based on the above data. He/she will also incorporate various scenarios that could impact the costs and accordingly build a buffer. This way, you will be prepared for the best and worst-case scenarios when challenges come.

Allocate cost: Based on the estimates, the accountant will help you allocate costs to different departments, projects, or products. He/she will also track each department’s expenses to assess its profitability and efficiency.

Budgeting: Depending on the cost allocated to each department, the accountant will help you prepare a budget. Depending on the scenario-based estimates, he/she will suggest adequate reserves needed to meet the changes in the cost. This will control cost overruns and help your business grow efficiently and within budget.

Cost Control: Each department will submit its actual spending at the end of the quarter/year. The accountant will analyze the variance between the actual and the estimate and identify gaps, whether in estimation or implementation. A detailed report will help business owners identify areas where costs are high so they can look for innovative ways to manage costs, such as automation or outsourcing.

The accountant will use various software and data analytics tools to make cost-accounting real-time and effective.

Does Your Small Business Need Cost Accounting?

Now that you know how cost accounting works, it is up to you as a business owner to analyze if your small business needs it. Various companies have different cost structures and associated complexities. For instance, manufacturing companies deal with inventory and production costs, restaurants with perishable inventory, rent and staff costs, and consulting and software companies with salaries, travel, and software development costs.

• If high costs hurt your profit margins and reduce your competitiveness, you might want to consider opting for cost accounting services.
• If you want to scale your operations, it is better first to project the cost and budget your expansion while giving some flexibility for error through cost accounting.
• If you have already expanded and costs are growing faster than revenue, you might want to consider cost accounting. Sometimes, cost control also requires pruning less profitable ventures and allocating resources to the profitable ones.

In the above scenarios, hiring third-party accounting services instead of burdening the internal accounting staff is a better option. When scaling or downsizing, third-party accounting services are efficient and can offer skilled accountants who can provide efficient solutions. It eliminates the need to hire and train accounting staff on the ever-changing accounting policies and procedures.

Contact Ford Keast LLP in London to Help You Grow Your Business

Talk to a professional accountant and discuss the possibilities cost accounting services can unleash for your business. At Ford Keast LLP, our accountants and bookkeepers can provide accurate reporting, data analysis, forecasting, and budgeting services. To learn more about how Ford Keast LLP can provide you with the best accounting expertise, contact us online or call us at 519-679-9330.