The business financial system records costs based upon the cost account type. The costs are often accrued near the end of fiscal quarter or year.
When to Use Cost Behavior
The finance system continuously records costs and allocates those to the appropriate accounts.
The business finance system creates a chart of accounts that establishes categories for collecting costs. These categories are determined in part based upon financial accounting and reporting rules and in part based upon what is best for the business managers.
- Cost accounts are divided into investment accounts and expense accounts. Finance must follow special tax and compliance rules for tracking and reporting investment accounts.
- Investment accounts are often strategic in nature with extra oversight by stakeholders.
- All cost accounts that are not investment accounts are expense accounts.
- Expense accounts are normally set up to aid finance and business management in the budgeting and tracking of business costs. Typical categories include business function, location, cost type (personnel, travel, material, etc.) and project.
- Since all financial transactions have both an amount and a date, finance also closely tracks the date for transactions. Most businesses assign the date using the accrual method which sets the date based upon when the activity was done, not when it was paid for. Near the end of a fiscal quarter or year finance will work closely with the functions to determine what expenses should be accrued in the current financial period.
Hints and Tips
- If you are having trouble understanding what is happening financially in your project or department, work with finance to redefine the cost accounts in a manner that gives you insight.
- If you are burdened by a large number of cost accounts that you need to track monthly and there are very few costs recorded in each account, work with finance to consolidate the accounts, reducing bureaucracy – just don’t reduce then number of accounts to the point that you can’t tell what is going on.
- If you have long and high cost activities occurring near the end of a quarter or year, create a way of estimating the percent of work that has been accomplished at the end of the fiscal period.
- Finance gets very picky about the investment accounts. There is a good reason. If those accounts get messed up, the business can be accused of filing fraudulent tax returns or financial reports. So don’t take it personally if they apply extra rigor on those accounts.
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