You are Losing Money – Part I – Components building your cost rates

When it comes to budget control management software, you may question, “Why should my company implement a budgeting and cost control tool when my accounting team can perform the same tasks?”

Well, you may have heard that there is difference between financial accounting and business accounting. So let us look at the difference first and then we will delve into what can go wrong.

Financial accounting

Financial accounting is required by regulation or law and follows a strict set of accounting standards that all accountants must apply to the financial records of the organization. In the U.S., accountants adhere to the rules of the accounting principles (GAAP). The rest of the world uses the International Financial Reporting Standards (IFRS) for financial accounting. With the use of established accounting standards regulators, tax authorities and investors have a straightforward basis for comparison in understanding and benchmarking company financial records.

Business accounting (also called managerial accounting) is focused on the needs of the business rather than aligning with external accounting standards. Business managers usually use it to produce a significant amount of projections and models, and is used to help management in decision-making and performance evaluation. Business accounting is not a must and rarely used in smaller organisations but always present in larger ones.

One of the major tasks in business accounting is understanding your cost structure in order to be able to price your good or services.

Fully loaded cost

So, how much does an hour of work in your company cost? Not an easy question to answer as you have different salaries, benefits etc. By definition fully loaded cost should comprise from variable and fixed costs, distributed fairly across resources.

In order to be able to calculate with your financial model you need to gather following information:

  • Employee salary – be it weekly, monthly or yearly
  • Bonus
  • Release costs
  • Social security
  • Health insurance
  • Office costs – mainly rent, office food
  • Equipment costs – lapop, monitor, adapters, desk, chair
  • HR costs – supervesion, evaluations
  • Recruitment costs – how much time it cost to recruit a person e.g. how many hours or fees to recruitment agencies
  • Incidental costs – company events etc.
  • Vacation days
  • Approximate sick days per year for the company

Once you got all this information we can move to calculating your fully loaded cost rate. This is a topic we address in our second article.

The Cronforce.com Team

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