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Types of Cost Accounting

Cost accounting involves the techniques for:

1. determining the costs of products, processes, projects, etc. in order to report the correct amounts on the financial statements, and
2. assisting management in making decisions and in the planning and control of an organization.
For example, cost accounting is used to compute the unit cost of a manufacturer’s products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.
Cost accounting had its roots in manufacturing businesses, but today it extends to service businesses. For example, a bank will use cost accounting to determine the cost of processing a customer’s check and/or a deposit. This in turn may provide management with guidance in the pricing of these services.
While cost accounting is often used within a company to aid in decision making, financial accounting is what the outside investor community typically sees. Financial accounting is a different representation of costs and financial performance that includes a company’s assets and liabilities. Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs, which can improve net margins for the company in the future.
One key difference between cost accounting and financial accounting is that while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to information needs of the management.
Types of Cost Accounting

 

  • Standard Cost Accounting

This type of cost accounting uses ratios to compare efficient uses of labor and materials to produce goods or services under standard conditions. Assessing these differences is called a variance analysis. Traditional cost accounting essentially allocates cost based on one measure, labor or machine hours. Due to the fact that overhead cost has risen proportionate to labor cost since the genesis of standard cost accounting, allocating overhead cost as an overall cost has ended up producing occasionally misleading insights.

 

  • Activity Based Costing

An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs, resources assigned to activities, and activities to cost objects based on consumption estimates.
Activity based costing accumulates the overheads from each department and assigns them to specific cost objects like services, customers, or products. The way these costs are assigned to cost objects are first decided in an activity analysis, where appropriate output measures are cost drivers. As result, activity based costing tends to be much more accurate and helpful when it comes to helping managers understand the cost and profitability of their company’s specific services or products. Accountants using activity based costing will pass out a survey to employees who will then account for the amount of time they spend on different tasks. This gives management a better idea of where their time and money is being spent.

 

  • Lean Accounting

Most accounting practices for manufacturing work off the assumption that whatever is being produced is done in a large scale. Instead of using standard costing, activity based costing, cost-plus pricing, or other management accounting systems, when using lean accounting those methods are replaced by value-based pricing and lean-focused performance measurements

 

  • Marginal Costing

Considered a simplified model of cost accounting, marginal costing is an analysis of the relationship between a product or service’s sales price, the volume of sales, the amount produced, expenses, costs and profits. That specific relationship is called the contribution margin.This type of analysis can be used by management to gain insight on potential profits as impacted by changing costs, what types of sales prices to establish, and types of marketing campaigns.

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Types of Accounting

Accounting is a vast and dynamic profession and is constantly adapting itself to the specific and varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the diversity of needs.

 

Financial Accounting, or financial reporting, is the process of producing information for external use usually in the form of financial statements. Financial statements reflect an entity’s past performance and current position based on a set of standards and guidelines. GAAP refers to the standard framework of guideline for financial accounting used in any given jurisdiction. This generally includes accounting standards, accounting conventions, and rules and regulations that accountants must follow in the preparation of the financial statements.

 

Management Accounting produces information primarily for internal use by the company’s management. The information produced is generally more detailed than that produced for external use to enable effective organization control and the fulfillment of the strategic aims and objectives of the entity. Information may be in the form budgets and forecasts, enabling an enterprise to plan effectively for its future or may include an assessment based on its past performance and results. The form and content of any report produced in the process is purely upon management’s discretion.

 

Cost accounting is a branch of management accounting and involves the application of various techniques to monitor and control costs. Its application is more suited to manufacturing concerns.

 

Governmental Accounting, also known as public accounting or federal accounting, refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state owned and privately owned institutions.

 

Tax Accounting refers to tax related matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction. Often these rules are different from the rules that govern the preparation of financial statements for public use. Tax accountants therefore adjust the financial statements prepared under financial accounting principles to account for the differences with rules prescribed by the tax laws. Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.

 

Forensic Accounting is the use of accounting, auditing and investigative techniques in cases of litigation or disputes. Common litigations where forensic accountants are hired include insurance claims, personal injury claims, suspected fraud and claims of professional negligence in a financial matter (e.g. business valuation).

 

Project Accounting refers to the use of accounting system to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management. It is a specialized branch of management accounting with a prime focus on ensuring the financial success of company projects such as the launch of a new product. Project accounting can be a source of competitive advantage for project-oriented businesses such as construction firms.

 

Social Accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting, refers to the process of reporting implications of an organization’s activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies. Social Accounting is still in the early stages of development and is considered to be a response to the growing environmental consciousness amongst the public at large.

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Payroll processing and calculation

Payroll processing consist of calculation of payments to employees for their work in the company – whether it is based on time or productivity, calculation of benefits, and statutory deductions. Payroll needs to be processed by each company periodically. It may be processed weekly, bimonthly, monthly or daily .

 
Payroll calculation is a complicated process that varies from company to company. Each company may have its own payroll structure consisting of various payroll components that may be unique to that company only. In addition, many location specific laws such as labor welfare act, Payment of salary and wages act, and the Minimum wages act affect the payroll calculations. Under minimum wages act, the employees need to be given some mandatory salary.

 
Payroll processing involves accurate payroll calculations, disbursal, payslip generation, and managing payroll taxes and record keeping compliance. All these activities cannot be rushed into and must be performed to ensure that employees do not get erroneous paychecks and all statutory compliances are met.

 
Employees are hired to do a specific job at a specific rate of pay. On a regular date determined by the company, these employees are paid. Some employees may be paid at different times, depending upon their status.

 
To prepare employee paychecks, the employer first calculates the pay for that pay period. Then the employer must withhold FICA taxes (Social Security and Medicare), and Federal and State income taxes from each paycheck. The employer may also deduct other amounts from the paycheck. These might include retirement plan and health plan contributions, union dues, and charitable contributions.

 
But “doing payroll” isn’t complete yet. After the employer distributes paychecks, other calculations must be done.
The employer must calculate and set aside amounts deducted from the employee’s pay, to be paid later. The employer must also set aside an amount for the employer’s contribution to FICA taxes and for unemployment taxes.

 
“Doing Payroll” also includes record keeping. A separate record must be kept for each employee, showing amounts paid for each pay period, for end-of-year reports. Records must also be kept of employee authorizations and any changes in pay.

 
If this all sounds complicated, it is. That’s why many employers outsource payroll, sending it to a payroll processing service or to a bookkeeper or accountant.

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need of business valuation

There are many reasons to have an up-to-date business valuation. You may need debt or equity financing for expansion or due to cash flow problems. Potential financiers or investors will want to see that the business has sufficient worth. You may be adding shareholders (or one or more shareholders may wish a buyout). In this case, share value will need to be determined.
How much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet. If for example, similar businesses in your area have recently sold, the value of your business will be determined in large part by the selling price of the previous sales.
Asset-Based Approaches total up all the investments in the business.Asset-based business valuations can be done on a going concern or on a liquidation basis.

  • A going concern asset-based approach lists the business’s net balance sheet value of its assets and subtracts the value of its liabilities.
  • A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

Using the asset-based approach to value a sole proprietorship is more difficult. In a corporation, all assets are owned by the company and would normally be included in a sale of the business. Assets in a sole proprietorship exist in the name of the owner and separating assets from business and personal use can be difficult.
A sole proprietor in a lawn care business may use various pieces of lawn care equipment for both business and personal use. A potential purchaser of the business would need to sort out which assets the owner intends to sell as part of the business.

Earning Value Approaches are predicated on the idea that a business’s true value lies in its ability to produce wealth in the future.
The most common earning value approach is Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company using a company’s record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.
To ensure that you set and get the best price when you’re selling a business, I recommend getting a business valuation done by a professional, such as a Chartered Business Valuator (CBV). A Business Valuator (or anyone valuating your business such as an accountant) will use a variety of business valuation methods to determine a fair price for your business.

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What is Bookkeeping ?

If you’re running a business, it doesn’t matter whether you’re an independent contractor or a growing company, managing accounts payable is a key part of your everyday business administration. Accounts payable is the process of tracking money owed by your business to suppliers. As your business grows, so does the complexity of your accounts payable process.

 

The term bookkeeping means different things to different people:

  • Some people think that bookkeeping is the same as accounting. They assume that keeping a company’s books and preparing its financial statements and tax reports are all part of bookkeeping.
  • Others see bookkeeping as limited to recording transactions in journals or daybooks and then posting the amounts into accounts in ledgers. After the amounts are posted, the bookkeeping has ended and an accountant with a college degree takes over. The accountant will make adjusting entries and then prepare the financial statements and other reports.
  • At mid-size and larger corporations the term bookkeeping might be absent. Often corporations have accounting departments staffed with accounting clerks who process accounts payable, accounts receivable, payroll, etc. The accounting clerks will be supervised by one or more accountants.

 

Bookkeeping (and accounting) involves the recording of a company’s financial transactions. The transactions will have to be identified, approved, sorted and stored in a manner so they can be retrieved and presented in the company’s financial statements and other reports.

 

Some of a company’s financial transactions:

  • The purchase of supplies with cash.
  • The purchase of merchandise on credit.
  • The sale of merchandise on credit.
  • Rent for the business office.
  • Salaries and wages earned by employees.
  • Buying equipment for the office.
  • Borrowing money from a bank.

 

The transactions will be sorted into perhaps hundreds of accounts including Cash, Accounts Receivable, Loans Payable, Accounts Payable, Sales, Rent Expense, Salaries Expense, Wages Expense Dept 1, Wages Expense Dept 2, etc. The amounts in each of the accounts will be reported on the company’s financial statements in detail or in summary form.

 

Start a daily regimen of entering incoming bills. If you incur a business credit card expense, enter it on the same day. Employee expenses should also be entered. Don’t forget to keep and securely store paper copies of all your documents too.Make a habit of paying your bills on a weekly basis and establish a window of payment that aligns with your supplier’s terms. If their terms are 30 days, don’t wait the 30 days to pay them; mail out the check or make the direct deposit payment a few days in advance of the deadline. This way you’ll maintain good relations with your vendors.

 

It’s inevitable that there will be times when cash flow is tight and paying bills on time can be challenging, be proactive. Refer back to all your suppliers’ terms to see if their payment windows allow for any wiggle room. If you know you can’t cover a payment this month, call your supplier and be honest: tell them you’ll make a minimum payment this month, and X amount next month until it’s paid off. While it’s not an ideal situation, and you may have to pay interest, it demonstrates to the supplier that you are proactive and serious about making payments. If you have a strong record of past payments, remind them of that fact and do whatever you can to reassure them of your business viability.

 

If your accounting system is taking up too much of your time, then you may want to enlist an assistant to help with some basic bookkeeping, or hire or outsource to an accountant. As your business grows, you might even want to consider the services full time .

 

 

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Financial statements analysis

Financial statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. Financial statements reflect the financial effects of business transactions and events on the company.

Statement of financial position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following

  • Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)
  • Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
  • Equity: What the business owes to its owners. Equity therefore represents the difference between the assets and liabilities.

 

Income statement, also known as the Profit and Loss Statement, reports the company’s financial performance in terms of net profit or loss over a specified period. Income statement is composed of the following :

  •  Income: What the business has earned over a period (e.g. sales revenue, dividend income, etc)
  •  Expense: The cost incurred by the business over a period (e.g. salaries and wages, rental charges, etc)

Net profit or loss is arrived by deducting expenses from income.

 

Cash flow statement, presents the movement in cash and bank balances over a period.

  • Operating Activities: Represents the cash flow from primary activities of a business.
  •  Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
  • Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.

 

Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners’ equity over a period. It is derived from the following components:

  •  Net Profit or loss during the period as reported in the income statement
  •  Share capital issued or repaid during the period
  •  Dividend payments
  •  Gains or losses recognized directly in equity (e.g. revaluation surpluses)
  •  Effects of a change in accounting policy or correction of accounting error

 

Financial statements are used by so many different types of people from investors, to creditors, managers and even employees. These statements are proven useful tools that provide valuable information about a business enabling the user of the statements to make the most appropriate business decisions.

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Financial Planning process

Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of a company.

Capital requirements  will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements. The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term. Framing financial policies with regards to cash control, lending, borrowings, etc. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

Financial planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies.

The importance of Financial planning

  • Adequate funds have to be ensured.
  • Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
  • Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
  • Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
  • Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
  • Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

 

The financial planning professional informs the client about the financial planning process, the services the financial planning professional offers, and the financial planning professional’s competencies and experience. The financial planning professional and the client determine whether the services offered by the financial planning professional and his or her competencies meet the needs of the client. The financial planning professional considers his or her skills, knowledge and experience in providing the services requested or likely to be required by the client. The financial planning professional determines if he or she has, and discloses, any conflict of interest. The financial planning professional and the client agree on the services to be provided.