The Importance of Accurate Costing

It’s no debate that the world is becoming increasingly globalized. Despite some barriers to entry into international business, geographical expansion and the use of imports and exports has become easier and more prevalent. Regardless of the size of a business or where it chooses to operate, one necessity remains constant, and that’s the need for accurate costing.

Without meticulous attention to cost information, a business would put itself in a very volatile position. It is imperative for a business to track costs carefully, so profit can be calculated against it in each period. This lets a business know how they are doing. In addition, accurate cost data allows a business to sculpt well-informed foresight to make future decisions.

Costing your goods

For example, if you are running an international business importing goods from Asia, you will undoubtedly have to work with a shipping company. Currently, uncertainty around freight costs and port charges can be problematic for importers. Often, freight companies do not send customers the final costs until the invoice is sent the next month. This creates a barrier for the business to maintain accurate costing when its final costs are not only delayed, but often subject to change.

Freight calculations usually involve a substantial amount of math, considering freight class conversions, fuel surcharges, exchange rates, service fees and port charges, alongside copious other factors. Therefore, software can generally make this calculation easier. However, if the software is using static data and automating the pricing math, then the freight cost quote can potentially be inaccurate. Hence, this would leave a business with inaccurate costing.

Costing accurately

The problem lies within the static data. Freight companies, like many others, are vulnerable to constant price changes. Older software used for quoting and shipping cannot often cope with rapid changes in prices such as fuel or port fees. Consequently, this type pricing module becomes quickly outdated. This is where real-time data comes in handy. Cloud-based software that operates with real-time data can work with a freight company alongside a specific shipment. As a result, a more accurate price can be delivered in real-time. This technology can manage the previous uncertainty and keep users’ records accurate.

Now, with accurate cost information, a business can run much more effectively. With accurate costing, sales prices can be set to a competitive margin. Since the base cost is established, a mark-up cost can be added on top of this base and sold at this price. Accurate costs also impact the measurement of gross margin. The cost-of-goods-sold expense is dependent on producing the correct data for product costs. When this calculation is off, it directly impacts the gross margin calculation.

Accurate costing also allows a business to make optimal choices. Often decisions boil down to cost factors. The cost is very influential and the implications could weigh heavily on a business if inaccurate costs are provided. Additionally, accurate costs can impact the valuation of assets. It is important to know proper cost values for assets, as it could change the result of a business’s balance sheet.

Recording all costs correctly and finding appropriate software to manage and mitigate inaccuracies will help keep a business going in the right direction.