One of my goals here at Accounting Solver is to demystify accounting terminology. Today we’re looking at costing terms used in manufacturing accounting: standard costing and normal costing.
Components of Manufacturing Cost
Before we get into the difference between normal and standard costing, a review of the components of manufacturing costs is in order. It’s crucial to get a good cost number so that a you know if you’re making a profit.
Manufactured products contain the following costs:

materials
direct labor
manufacturing overhead (based on a predetermined rate)

Tracking these costs from acquisition through …read more

AccountingSolver received an insightful comment from Mary Schaeffer, Author Controller & CFO’s Guide to Accounts Payable (John Wiley & Sons 2007) & 12 other business books, Editorial Director Accounts Payable Now & Tomorrow (http://ap-now.com/blog/):
“I just read a post on another blog recommending payment stretching as a way of improving cash flow. And, to be honest, it will do just that – at least temporarily.
But the pundits that recommend this tactic overlook a few things. First, it will annoy the you know what out of your suppliers. They have no interest in becoming your banker – they are worried enough about …read more

One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable).  If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues.
In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.  One of the most effective ways of reducing the need for Working Capital is through suppliers’ credit or your accounts payable.  It would be a great advantage …read more

One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues. Make sure that your Cost of Goods per unit stays the same (of course, the absolute / total amount will grow). With your Cost of Goods per unit kept at the same level (and with your accounts receivable not exceeding 25% of your …read more

One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). However, you don’t want to have a lot of sales, but end up lacking enough cash to continue production and pay for operating expenses. Prudent thumb rules to follow are:
1 It goes without saying that you cannot extend credit of however short a term to customers whom you do not know or whom you know to have doubtful paying habits.
2 As a general rule, the portion of …read more

Working Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.
What you want to do with your Cost of Goods is to turn it into cash as fast as you can (i.e., sales). One way of stimulating sales is to extend …read more

Working Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.
If you are not able to sell your products (i.e., they remain in inventory), you put pressure on your Working Capital. You will need more cash (i.e., Working Capital) to pay …read more

Working Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.
One of the most effective ways of reducing the need for Working Capital is through suppliers’ credit or your accounts payable. It would be a great advantage if you were able …read more

Working Capital funds the cost of the labor & materials that go into the goods you sell (or the services you render) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses).
The basic structure of your Income Statement determines whether you should fund your Working Capital from Equity or whether you can afford to fund it from Debt. If your Cost of Goods Sold eats into your Revenues by not more than 30%, and your Operating Expenses are more or less equal to your Cost of Goods Sold, you can afford to fund …read more

Working Capital funds the cost of the labor & materials that go into the goods you sell (or the services you render) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses).
If you do not put up enough money for Working Capital –whether from Equity or Debt, you will be forced to incur more debt than your business can support. You will be forced to inordinately prolong accounts payable so that you get into trouble with your suppliers. Not having adequate Working Capital will place your business in an unsustainable cycle …read more