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From the Financial Hotline

By: Financial Hotline
Fall 2021 (Vol. 39, No. 3)

Q: I was advised to incorporate cost accounting for my business. What exactly is that?

A: Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.

Cost accounting differs from financial accounting because it’s only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

  • Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

  • Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

  • Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.

To monitor your company’s costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs do not fluctuate with changes in production or sales and include rent, insurance, dues and subscriptions, equipment leases, payments on loans, management salaries and advertising.

Variable costs do change with variations in production and sales. Variable costs include raw materials, hourly wages and commissions, utilities, inventory, office supplies, packaging, mailing, and shipping costs.

Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company’s functioning.

Q: What are the main differences between stocks, bonds and mutual funds?

A: Bonds, stocks and mutual funds are three basic types of investment options. They have the potential to earn more than a bank account or a certificate of deposit (CD) but they in turn may carry a greater risk of loss.

Bonds are usually issued by Governments, municipalities and companies as a way to raise money. You are essentially lending the issuer money in exchange for their promise to pay you back the principal (the amount you invested) with interest by a certain due date or maturity date. Some bonds also offer tax advantages. One example is U.S. savings bonds.

Stocks allow you to purchase and own a share of a company. When a company wants to raise money, it will sell shares of its stock. Some companies give you voting rights at annual meetings and some periodically pay shareholders part of profits. This is called a dividend. On the other hand, if you purchase a share of stock and the price goes down, when you sell it, you will lose money.

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Most mutual funds’ investments are outlined in the fund’s prospectus.

Q: What is a high yield checking account?

A: You have heard of credit cards that offer rewards? Now, many banks offer checking accounts with automatic rewards or higher interest returns. Why choose a high- interest account?

A typical savings account earns only a fraction of a percent in interest. The average bank CD locks your cash up for years for .27% APY. But if you can earn closer to 1% plus earn instant rewards with the right high yield checking account. However, there are specific requirements for earning interest. For example, you can earn 2.09% APY on balances up to $10,000 with Consumers Credit Union Free Rewards Checking. But only if you also make 12 monthly debit card purchases, have monthly electronic transactions of at least $500 and receive e-statements. You can earn even more if you use a Consumers Credit Union credit card, too. Meet the requirements above and also make $500 in credit card purchases, and you earn 3.09% APY on balances up to $10,000. Make an additional $500 in credit card purchases, and the APY on balances up to $10,000 is 4.09%. If you don’t meet monthly requirements, your money earns 0.01% APY on all balances.

Look for accounts that have competitive rates and low fees. You don’t want to pay a monthly maintenance charge that cancels out your earnings.