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How Cost Accounting Can Help Your Business Succeed

WHY EVERY BUSINESS CAN BENEFIT FROM COST ACCOUNTING AKA 'COSTING'

If you find yourself wondering what type of products, services, or customers bring your business the best return, then your business may benefit from a costing system or costing method.  What is costing?  Costing is a simple or complex system of controls and processes that you can employ to help you determine what it costs you to produce a product, provide a service, and operate your business.  You can set up costing systems to help you analyze costs by direct and indirect costs of production, by function, by business or consumer behavior, and just about any other factor that may affect how you provide a product or service or how your clients consume it.

Because costing can provide you so many insights about your business, you want to tailor your costing system to your business so you can get the greatest benefits.  Every business is different, and the main reason to have a costing system is to help you learn about and improve your business, so start by asking yourself what you want to know about your operations.

BUSINESS OWNERS HAVE QUESTIONS THAT A GOOD COSTING METHOD CAN HELP YOU ANSWER

A well-planned costing system can help you answer questions about your business such as the following:

  1. Which of my products or product lines has the highest profit margin?
  2. Which stores or locations are most profitable?
  3. Are all of our current service offerings profitable?
  4. Where can I cut costs across my business to improve profitability?
  5. Which processes do I need to improve to generate higher margins?
  6. How much revenue do I need from the sale of products or services to cover my overhead?
  7. Can I provide this product or service at a lower price than my competitors?

These are just some of the questions you can begin to answer about your business with the use of a costing system.  Generally, as you learn more about your business, the more questions you will have.  That's why it's important to start somewhere because you can always tweak the system to make it work better for you.

Keep in mind that implementing a costing system does require discipline and structure because to repeat results, you will need to have processes and controls that you can duplicate and consistently apply.  Therefore, you cannot plan to have your costing system provide you with the cost to produce a product without a process that you can track, monitor, and measure.

Let's consider how a 3D printing shop might be able to implement.  First, we must consider the costs a 3D printing company will incur.

3D PRINTER DIRECT VS INDIRECT COSTING
Cost What You Must Consider Type of cost
3D Printer

How much will the printer cost to purchase or assemble?

What is the lifespan of this printer and how many printed units can it be expected to produce?

What will your recurring maintenance and parts replacement costs be for the printer over its lifespan?

Direct
Printing Material Your costs will vary greatly based on what type of material(s) you are using for printing.  You will need to know the unit cost of any material so you can track the cost/unit for your various raw materials. Direct
Production Labor Will you employ individuals to complete the printing or will it be automated in some way?  This cost may also vary greatly based on your need to have employees manage the printing process Direct
Taxes & Royalties Will you need to collect & remit taxes for the sale of your printed products?  Although you will pass on the cost of the tax to your customer, you will also have some costs associated with filing and paying taxes you collect.  You will need to make sure you are able to accurately charge and remit taxes for your various jurisdictions through the use of your point of sale software. Direct
Overhead Rent, utilities, administrative labor, insurance, and other operating costs not directly associated with the production of printed products Indirect

 

UTILIZING DIRECT VS INDIRECT COSTING

A 3D printer may want to review their direct & indirect costs if they are updating their pricing and want to consider what type of markup they will need on their direct costs to cover their indirect costs and still provide a profit on each sale.  This analysis will help the printer decide what sales volume they will need in order to meet their profitability targets.

To create a costing method for a 3D company, we need to create categories and subcategories of accounts or custom data fields to help us track the various costs associated with production.  For instance, you may want to assign product or cost codes to the various items you sell.  Material and labor costs associated with the production of these items can then be categorized as the cost is incurred.

You also want to keep in mind how practical it will be to track your costs by your cost codes.  If you cannot track expenses for every single product, then you may need to group your costs into broader categories.  For example, it may not be practical for employees to track their time to manage the printing of each product, but if you can track the cost by batches, by printer, by product, or another category which can then help you decide how you can allocate these cost to the products produced.

UTILIZING EXISTING & CUSTOM FIELDS IN QUICKBOOKS, XERO, & ZOHO

To categorize costs as incurred, you must utilize tracking software or similar tools, which could be financial software itself or separate software that is compatible and integrated with your financial software.  Here are some of the key fields you can use if you have Quickbooks, Xero, or Zoho to help you create a costing method for your company.

Quickbooks, for instance, provides categorization fields like Class, Location, Projects, Products & Services, but you can also use other standard fields like customer and employee data to help you track for costing purposes.

Xero lets you set up tracking Categories, which you can use to track locations, departments, or any other category you want to set up.  Xero also has Projects and Items for categorization.

Zoho allows you to add custom fields for invoicing, custom fields for estimates, and it has relatively robust project tracking that you can utilize throughout invoicing and expense tracking.

No matter the industry or business, costing can help you improve your operations and results by providing answers to questions managers and owners need to understand what's work and what is not.  The best way to start costing is to keep it simple initially and keep evolving your methods and processes based on what you learn about your business.

Still not sure where to start, but know you need help. Contact us to see how we can help.

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