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Cost Accounting For Profit With Accounting Software

by diyaccounting

Cost accounting is a complex subject that specialist accountants
use to examine and report on business expenses to ensure
financial control. Such expert cost accounting might involve
absorption costing, marginal costing, break even and variance
analysis. Such specialist accounting techniques are not usually
available to the small business as they lack a cost accountant.

The good news for small business is that the majority do not
need such specialist costing analysis as then proprietor usually
has intimate detailed knowledge of all business expenses
incurred. Or at least the small business believes he has that
knowledge.

In truth it is not until regular bookkeeping records are
produced that the small business can stand back and examine the
real effect of the business expenses on the profitability of the
business. And by virtually taking a third party view of the costs
and effect of those expenses on profitability can the financial
decision be taken to improve profitability.

Producing accounts on a monthly basis using accounting software
suitable for the size and accounting experience of the small
business owner is the first step to improving profitability. The
second step is to review those accounts and determine just which
cost items can be changed.

Costs occur and behave in different ways. Some business expenses
may be regarded as fixed costs which others are termed variable
or semi variable costs. The impact of sales volume increases or
decreases variable costs and the marginal gross profit produced
while turnover has little impact on fixed costs in the short and
medium timescales.

Having produced a monthly profit and loss account and started
the accounting for profit review of the financial figures it is
useful to separate the nature of the expenses into those that are
fixed and those expenses which are variable costs and those
expenses which are semi variable costs.

Fixed costs means the level of expenditure does not vary with
normal changes in sales volume in the short and medium term at
least. But being fixed does not mean the rice of that expense
cannot be reduced by examining both the value for money obtained
and whether that cost is necessary in the first place.

Fixed costs of a small business might include such items as rent
and premises costs, insurance and indemnity premiums, capital
costs of fixed assets, administrative, legal and professional
fees. Another way to view what is and what is not a fixed cost is
to determine which costs are incurred to provide the base
operating facility of the business.

If by changing the base of the business or negotiating better
rates for those base expenses the fixed costs can be lowered then
the pressure on generating gross profit is reduced. Fixed
expenses may also contain such waste expenditure and any non
essential expenditure in this area should be reviewed for
potential elimination on the basis that if it can be dispensed
with without affecting sales volume then chop out that expense as
waste.

Variable costs depend heavily on the products or services being
provided but are essential the cost of goods and services being
sold. Often called direct costs the variable costs of a business
should be reviewed for ways to reduce the unit cost either by
sourcing cheaper supplies at the same quality levels or
negotiating more effective prices. The volume of purchases can
obviously affect the variable cost and consideration may be given
to placing regular orders, higher volume orders or negotiating
settlement discounts.

Direct costs are perhaps one of the one most influential cost
areas in that the lower the direct cost that can be achieved
reduces the sales volume required to reach and exceed the beak
even point and also puts less pressure on the fixed costs.

Semi variable expenses would be those items which the small
business makes definite decisions to buy depending upon the
requirements of the products and the level of volume required.
Many semi variable costs are dependent upon the management
decisions of the small business owner and are a critical area in
which the success or failure of the business may depend.

Semi variable costs may include the advertising and promotion
costs of the business, perhaps the transport and distribution
costs, direct employees and goods or services bought in to
support the sales volume.

Each variable cost should be reviewed and a decision made on
whether value for money is being obtained. That review should
also examine whether the level of support the semi variable costs
provide to the achievement of financial success is adequate,
improvable or could be dispensed with.

Accounting for profit is the key area in which to examine all
costs. Accounting or bookkeeping software can be a useful tool to
identify the volume and levels of expense. The nature and
performance of each expenditure classification should be
subjected to the critical review of the small business owner to
generate either a higher or safer financial performance.

Terry Cartwright of DIY Accounting designs <a
href="http://www.diyaccounting.co.uk/ ">Accounting </a> software
on excel spreadsheets providing complete <a
href="http://www.diyaccounting.co.uk/smallbusinessaccounting.htm">Small
Business Accounting Software</a> solutions for with single and
double entry <a
href="http://www.diyaccounting.co.uk/bookkeeping.htm">Bookkeeping</a>
solutions for limited companies and self employed business

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