Category: Accountants

Accountants are indispensable in our system of government. Once every year the majority of Americans make arrangements to fulfill an obligation to their government by filing a Tax Return. Most people need help filing their taxes, so they hire a tax preparation professional which could range from a CPA for a business returns to a tax consultant for individual returns.

Some Operating And Accounting Costs A Business Incurs


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Direct & indirect costs

Direct costs are those costs that can be directly attributed to a product or product line, or to one source of sales revenue, or one business unit or operation of the business. An example of a direct cost would be the cost of tires on a new automobile.

Indirect Costs are very different and can’t be attached to any specific product, unit or activity. The cost of labor or benefits for an auto manufacturer is certainly a cost, but it can’t be attached to any one vehicle. Each business has to devise a method of allocating indirect costs to different products, sources of sales revenue, business units, etc.

Most allocation methods are less than perfect, and generally end up being arbitrary to one degree or another. Business managers and accounts should always keep an eye on the allocation methods used for indirect costs and take the cost figures produced by these methods with a grain of salt.

Fixed & variable costs

Fixed Costs are those costs that stay the same over a relatively broad range of sales volume or production output. They’re like an albatross around the neck of business and a company must sell its product at a high enough profit to at least break even.

Variable Costs can increase and decrease in proportion to changes in sales or production level. Variable costs vary proportionately with changes in production

Relevant & irrelevant costs

Relevant Costs are essentially future costs that could be incurred, depending on what strategic course a business takes. If an auto manufacturer decides to increase production, but the cost of tires goes up, than that cost needs to be taken into consideration.

Irrelevant Costs are those that should be disregarded when deciding on a future course of action. They’re costs that could cause you to make a wrong decision. Whereas relevant costs are future costs, irrelevant costs are those costs that were incurred in the past. The money’s gone.

A Brief Insight Into GAAP

While many businesses assume that accountants are bound by generally accepted accounting practices and that these are inviolate, nothing could be further from the truth. Everything is subject to interpretation, and GAAP (Generally Accepted Accounting Principles) is no different. For one thing, GAAP permit alternative accounting methods to be used for certain expenses and for revenue in certain specialized types of businesses.

For another, GAAP methods require that decisions be made about the timing for recording revenue and expenses, or they require that key factors be quantified. Deciding on the timing of revenue and expenses and putting definite values on these factors require judgments, estimates and interpretations which, when arrived at in a forthright and responsible manner are acceptable to GAAP, despite the method used.

The mission of GAAP over the years has been to standardize accounting methods in order to bring about uniformity across all businesses. But alternative methods are still permitted for certain basic business expenses. No tests are required to determine whether one method is more preferable than another. A business is free to select whichever method it wants.

However, if a business is to use an alternative accounting method, it must choose which cost of goods sold expense method to use and which depreciation expense method to use. For other expenses and for sales revenue, one general accounting method has been established, which is GAAP, a set of accounting rules used to standardize the reporting of financial statements in the United States; there are no alternative methods.

Notwithstanding, a business has a fair amount of latitude in actually implementing the methods. One business applies the accounting methods in a conservative manner, and another business may apply the methods in a more liberal manner. The end result is more diversity between businesses in their profit measure and financial statements than one might expect, considering that GAAP have been evolving since 1930.

The pronouncement on GAAP prepared by the Financial Accounting Standards Board (FASB) is now more than 1000 pages long. And that doesn’t even include the rules and regulations issued by the federal regulatory agency that has jurisdiction over the financial reporting and accounting methods of publicly owned businesses – the Securities and Exchange Commission (SEC).