Sooner or later all new entrepreneurs ask themselves: Why is costing necessary?

Cost analysis is vital for businesses because entrepreneurs cannot optimize expenses unless they clearly understand what they consist of and which business performance indicators will be impacted by the changes and which will not.

Costing is needed to valuate inventory objectively, determine the wholesale and retail prices, calculate and control the return on sales (ROS) of each specific item.
Knowing the unit cost, you can easily determine the required/minimum acceptable markup for the selling price to reach the projected profits.

One of the key factors contributing to accurate financial reporting is the correct inventory valuation. Inventory is considered to be short-term assets, and as working capital it should be valuated based on its acquisition cost.

Why is the cost generally not equal to the latest purchase price?

Current stock may include goods purchased at different times at different prices. They will be sold over a period of time. Thus, inventory should not be valuated based on the latest purchase price.


Inventory valuation methods

The two most common methods used for inventory valuation are FIFO and AVG (Weighted Average Cost method).


Systems of inventory

It should also be mentioned that two systems of inventory are generally used for keeping records of inventory: periodic inventory system and perpetual inventory system.


Overhead expenses

By default PayTraq uses only direct expenses in costing, meaning only the prices of the goods purchased or the unit prices specified during adjustment.
If any overhead expenses need to be included in the unit cost, such as expenses related to transportation, storage or customs clearance, this can be done individually for each shipment by selecting the supplier’s invoice corresponding to the given shipment and then the tab “Overhead Costs”. Overhead expenses are posted by specifying the expenditure account to which the overhead expenses relate and the amount of the expenses.


Actual cost calculation

It is recommended that actual cost is calculated at the end of the period in which all the operations have been completed, meaning all incoming and outgoing invoices have already been posted for this period. For example, the calculation date can be the last day of the previous month.
If cost is calculated on the current date or a date close to the current one, the chances are high that new operations will be posted impacting the accuracy of the calculation. Therefore, posting of the new operations will get the given calculation deleted.