ELIMINATING
the CONFUSION
COST ACCOUNTING vs TAX ACCOUNTING
Accounting, a word that
conjures up the image of Ebeneezer Scrooge sitting at his desk with quill in
hand entering numbers in a ledger. Not a
favorable image is it? Yet keeping
records is essential for business success.
Few companies make it a priority to keep their records up to date. Nor do they take the time to understand the
difference between tax accounting and cost accounting. Both are necessary and yet each one has a
different goal.
Tax accounting, is what you
do to make various government entities happy and report to them. It aims
at taking advantage of all the opportunities the government offers to reduce
tax obligations. It doesn’t care about all the details of cost. Instead it deals in gross figures. It accounts for insurance premiums paid
rather than rates of insurance, for example.
It allows plans of depreciation for investments rather than expected
time of replacement. The lower the
profit calculated, the lower the tax obligation. It is difficult, if not impossible, to
develop proper pricing from tax accounting.
Cost Accounting, is aimed at calculating all of the costs incurred in producing a product,
service or project so the business owner or manager knows how much the company
must charge for the item.
Management priorities are to stay
in business, recover the owners’ investments in the business itself, earn a
reasonable return on the investment in the business for the owners, pay off
company debt, build a reserve to reduce the need for debt and produce a
reasonable profit, after taxes, for the company’s growth.
In order to accomplish these
objectives, cost accounting must allocate costs where they belong. Deductible taxes and employee benefits must be attached
to the proper categories: materials that
become an integral part of the project, labor with varying rates for different
categories, such as, social security, medicare, unemployment insurance and
retirement benefits.
Other project costs must be
added, like the transportation of materials and workers, the cost per hour or
mile for each vehicle or piece of heavy equipment (original cost, years of
life, maintenance costs, repair costs, insurance costs and the expected annual
hours of use) and subcontractors fees.
Administrative costs, finance
costs, plus commissions and royalties must then be added.
Neglecting the tasks and
details of cost accounting for pricing products and services properly is one of
the reason ninety percent of businesses fail within the first ten years of
their beginning.
- JoAnn Forrester & James W. Martin, SI
Business Associates, 412-440-6969
Hate to do this...give us a call...with our Price it Perfect Cost Management,(TM)
CFO in a Box System it is a snap for us...412-440-6969.
P.S. Watch for our upcoming E-book on Pricing...coming soon!
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