Wednesday, 28 Dec 2022
Businesses always worry about managing their expenses to maintain a positive cash flow. Budgeting and cost-cutting measures employed by the bookkeeper keep the outflow of capital in check and the business stable. However, growing inflation and rising costs of materials and resources in Melbourne have made it challenging to stay within budget.
Thus, entrepreneurs need to look closely at their fixed, variable and semi-variable costs to generate the desired profits while reducing expenses. Experienced bookkeepers rely on cost accounting to know how the business is spending on various activities. The process involves recording all types of costs incurred by the company in Melbourne to maximise its productivity.
It helps to identify where the money is going, how much is getting utilised and how much is getting wasted. Cost accounting is based on three types of costs: fixed, variable and semi-variable. Let us help you understand the importance of these costs in accounting and managing business expenses.
Cost accounting is the preparation of the cost structure of the business for analysis by the experienced bookkeeper Melbourne. It requires assigning a price tag to products, services and activities that incur a business expense. The analysis of the costs provides insight into spending and how it can be controlled for effective financial management.
Cost accounting is an elaborate process that is similar to traditional bookkeeping, which involves the development, measurement and analysis of information. The cost structure is required by business owners to know their costs and make decisions based on them. For example, if the company in Melbourne intends to introduce a new product, it will have to examine the cost structure for product pricing and budgeting. It helps to plan for future expenses accurately.
Cost accounting gives bookkeepers an idea about the bare minimum expenditure that must be incurred by the business to sustain its operations without compromising quality. For this, the business owner needs to understand the fixed and variable costs. It is essential for analysing data effectively.
A fixed cost is an expense that is vital for running the business and does not change with alterations in sales or production volumes. These prices also do not fluctuate in recession or inflation. For example, rent for commercial property in Melbourne, loan repayment instalments, web hosting fee for the business website, depreciation of business equipment, etc.
A variable cost is an expense that goes up and down in conjunction with the rise and fall of production volumes. Thus, these costs fluctuate as production is altered. For example, the cost of raw materials used to manufacture the goods. If the company is producing more and selling more, it will need more raw materials, and thus, the cost will go up. Other examples of variable costs include transportation of goods costs in Melbourne, maintenance expenses and packing costs. They are directly proportional to the production output.
A semi-variable cost consists of both fixed costs and variable costs. For example, the cost of electricity incurred by a manufacturer in Melbourne. The electricity required to light up the workshop and power equipment will remain the same. However, when the number of goods manufactured increases, the consumption of electricity will also rise. Thus, many entrepreneurs switch to energy upgrade for their businesses to reduce costs.
Thus, the semi-variable cost is also proportional to production volume, but the rate of going up and down is quite low. The reason behind this slow growth and fall of the semi-variable cost is its fixed component. In the electricity example, the base level cost is the fixed cost and the additional cost, according to the number of units manufactured, is the variable cost. Its formula is as follows:
Semi-variable cost = fixed cost + variable cost
Many business owners fail to consider the semi-variable costs. However, bookkeepers in Melbourne insist on using them in accounting by breaking them down into fixed and variable costs. Thus, mixed costs should be carefully broken down and classified into categories to get the right cost structure.
The three types of costs are a part of cost accounting and help to identify the selling prices. For example, if a business is selling pre-mixed coffee in Melbourne, they need to know the cost of coffee beans, sugar, milk powder, packaging, and the process of creating the mix. It is needed to ascertain the cost of goods sold.
If the bookkeeper feels that the cost of the ingredients or packaging is high and can be reduced, they can quickly increase their revenue. Also, they can price it at a premium in the market to generate higher profits. Cost accounting helps to maintain cost controls during these activities through effective inventory management and budgeting.
Bookkeepers can use the data accumulated for cost accounting to prepare financial statements because they already know the cost of raw materials and stock. Also, entrepreneurs in Melbourne can use the information in their financial decision-making process.
Expenses are inevitable when you are running a business, but they can be controlled and managed with a clear understanding of the cost structure. Thus, bookkeepers use cost accounting to categorise expenses correctly and make sense of the business expenses.
