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Five cost accounting basics you need to know

Joy Richardson

Joy Richardson

Cost accounting is one of the most complex variables in managing your business budget, and is often prone to errors; either broken formulas in a spreadsheet, or misrepresented data. That said, it is also an invaluable tool in being able to reduce and eliminate unnecessary costs for your business, but its complexity is often overlooked. If you aren’t familiar with the cost accounting basics, or need a refresher on where you might be able to tighten the nuts and bolts where costs and expenses are concerned, you’re in the right place. These five cost accounting basics will keep you on your toes as you prepare for the end of this fiscal year.

 

Five cost accounting basics you need to know

  1. The matching principle: This principle is based on the idea that your company’s monthly revenue for a particular product or service should be matched with the costs of providing that product or service. If you are selling ball point pens in June, the costs of making those pens this month should be matched with the revenues in sales.
  2. Contribution margin: Once you have all your revenues matched with your costs, you can figure out your contribution margin, which is defined by your sales minus your variable costs. By subtracting your fixed costs from your contribution margin, what you have left over is your profit.
  3. Four costs: There are four types of costs to keep track of in cost accounting. Direct costs can be directly traced to a product, such as material or labor costs. Indirect costs are allocated based on any level of interaction, such as overhead costs. Fixed costs never vary, like a lease, while variable costs change with the level of production, like materials.
  4. Break-even point formula: The break-even point is the moment when the level of your sales reaches a point where your profit is zero, meaning that you’ve covered your costs. The break-even point formula is your sales minus variable costs, minus fixed cost. You also multiply your sales per unit by units sold, as well as multiply variable costs by the same units sold. Whatever sales number makes the formula equal to zero is your break-even point.
  5. Relevant range: This is a cost accounting basics term that deals with equipment and machinery in your business. Whether it’s a vehicle or a technical work station like a computer or manufacturing machine, there is an optimal range of operation. Relevant range is essentially the maximum level of operation for any given piece of equipment, and as soon as you exceed that range you need to consider purchasing a second piece of equipment for the best possible results.

 

These are just a few of the necessary cost accounting basics that will have you well on your way to better tracking and eliminating of costs and expenses. Cost accounting does get quite complicated, which is why many businesses turn to financial  that automates these complex formulas and then visualizes them for better understanding by management and investors.

 

If you are looking to make this change in your cost accounting processes, visit Questica. Our software and team of experts can help you with your planning and forecasting needs. Like what you see? Request a demo of our product in action, today!

 

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