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Accounting
Financial Accounting vs. Cost Accounting in a Small Business
The Difference between cost accounting and financial accounting is the way information is treated and presented in reports.
Financial accounting reports a business’ financial performance to the outside world like ATO, creditors, banks, and other parties.
It works on facts with exact figures or commitments. Comparing the financial accounting and the Fairy-tale of your budget is very important to ensure you are on target regularly.
Financial accounting should continue regularly to ensure it is up to date.
Cost accounting is an internal procedure standard not available to the outside. It produces a cost price, which, together with Gross Profit, create a sales price for products or services offered for sale to the public.
There are different cost accounting system around and not guided by the Generally Accepted Accounting Principles.
Cost accounting often is neglected in small businesses, but it is the foundation for the products or services you provide. It is, as the footing is in a house, hidden below your sales price. If the footing of a house is made faulty, the house will need repairs regularly with loss of money. It is the same with lousy cost control.
It is the most significant reason for small businesses to crash and lose money.
Cost accounting is an internal procedure standard not available to the outside. It produces a cost price, which, together with Gross Profit, create a sales price for products or services offered for sale to the public.
There are different cost accounting system around and not guided by the Generally Accepted Accounting Principles.
Cost accounting often is neglected in small businesses, but it is the foundation for the products or services you provide. It is, as the footing is in a house, hidden below your sales price. If the footing of a house is made faulty, the house will need repairs regularly with loss of money. It is the same with lousy cost control.
It is the most significant reason for small businesses to crash and lose money.
An online business for animal medicine sold all their product with free mailing. The prices were on average $68 with a turnover of $2,000,000, which equals 29,400 unit sold. The free postage and packaging were not included in their cost accounting, and with an estimated unit cost for postage at $4.00, they lost more than $100,000 a year.
Bad 2 Examples good
On a car repair shop's invoices, you will notice the last item is called incidental. This is for small items which are too unpractical and cheap to be counted. Here It is not the unit price there are significant but the volume. They have set a fixed amount to cover these costs on each invoice.
Gross profit or markup is like the roof on the house.
It is what you add to the cost price to get a sales price.
You use the gross profit to pay for general costs like:
Admin cost Rent/lease of workshop or office
Transport Marketing
Your wages Your partner’s wages if any business
Professional help Maintenance of tools etc.
Bank cost Interest
Unknown cost What is left = profit
Activity-based cost accounting is the best-suited system for smaller businesses. The system assumes indirect cost as a direct cost so a more exact cost price can be ensured.
Many small businesses lose thousands of dollars each year because they only use direct material and Labour cost and then adder a figure as a profit justified on what they think the product or service is worth.
It makes budgeting difficult and doubtful as sales volume don't provide a guaranty for sufficient gross profit to meet their business' general cost.