FINANCIAL FOCUS: The value of cost accounting
CHARLESTON -- The concept of managing "by the numbers" has varying degrees of meaning. Many business and financial managers know their operations well enough that they don't really need a lot of financial information in order to monitor and manage their companies. They often rely on tracking cash flow as their preferred method of managing by the numbers.
On the other hand, many managers depend on quarterly or monthly financial reports as a means to review the company's performance. To be sure, the true value of monitoring financial performance is utilizing the information as a management tool.
Cost Accounting is a simple, but very powerful, method to provide a higher level of focus to managing by the numbers. Cost accounting is also referred to as project costing or job costing. Regardless of the nomenclature, good cost accounting requires a higher level of discipline and detail within the accounting function in order to provide accurate data for use as a management tool.
The purpose and value of cost accounting is to segment areas of the business in order to better manage those segments. Some examples:
* A restaurant wants to evaluate sales and profitability by day of the week, by groupings of menu items, or by lunch vs. dinner.
* An accounting or law firm wants to determine profitability by client industry groups, by type of service provided, and by various employee groupings.
* An ambulance service wants to determine profitability by county of operation, by insurance provider or by emergency services vs. other transport operations.
Regardless of the type of business, the cost accounting process begins with accurate coding of revenue and expenses during the posting of payroll, payables and receivables. While this is not a complicated process, it requires specific direction based on the goals of evaluating particular financial aspects of the business. It also requires discipline within the accounting function to correctly code revenues and expenses.
Virtually all accounting software begs for cost accounting applications. The capability of separate profit/cost centers, segmenting revenue groupings, coding expenses by multiple criteria and breaking down financial information by time elements are a simple task IF the cost accounting function has been well planned and accurate coding has taken place.
Cost accounting is a simple, but extremely powerful tool that is underutilized by most companies. I encourage you to think about potential applications of this technique that could provide financial information designed to assist you in managing your business.
Nistendirk is a partner at Woomer, Nistendirk & Associates PLLC, a CPA firm located in Charleston. Bob has extensive experience in tax accounting, strategic planning and financial/business consulting. He can be contacted at email@example.com.