Week of January 23, 2017: Intro & Using Manufacturing Concepts in a Service Business
Starting this week we will begin publishing an accounting tip of the week. These tips will be relatively basic in nature and will cover business & personal tips. The goal of these tips is to help guide the guide the reader in an informed direction so they can ask more informed and relevant questions on the topic.
When I was in school learning accounting, I absolutely despised Cost Accounting and how to keep an accounting of a Manufacturing Business. However, when I moved out of public accounting to industry accounting, I found I actually enjoyed manufacturing and cost accounting. What I found in practice was the cost & pricing models of a business can potentially hinder the growth of an organization if not conducted appropriately.
Where I am going with this is the same concepts used to cost and account for a product apply to providing a service. Instead of Cost of Goods sold a service company has Cost of Service. Also, the concepts of fixed and variable costs remain relevant across ALL business regardless of size or industry.
If you Google or even select a pre-defined chart of accounts for a service business in your favorite accounting package you will probably find there are Revenue accounts and Operating expense Accounts with no consideration being given to a Cost of Services section. Knowing the per hour cost of your service time is equally as important as knowing the cost of a widget.
In conclusion for this week's tip, I encourage you to examine how you track your company's expenses and see if using the "Manufacturing Approach" can provide you with better information out of your systems. For my own business I actually utilize inventory tracking to keep up with my services, their costs, and pricing.