Magazine article The National Public Accountant

Advising the Small Business Client

Magazine article The National Public Accountant

Advising the Small Business Client

Article excerpt

Advising the Small Business Client

Sharon's Cakery began operation on October 1, 1988, in the garage of Sharon Green. The business specializes in delivery of homemade cakes for weddings and special occasions. Due to the increased number of customers, Sharon is considering moving to a vacant office building and devoting full time to the business. Sharon is currently employed at Gold's Cafe as a waitress where she makes $20,000 a year.

Sharon has estimated the following costs of opening the new business:

Purchase of new oven          $       7,500
Purchase of delivery truck    $      18,000
Purchase of furnishings       $      12,000
Monthly rent                  $       1,500
Wages of employees            $   5.50/hour
Insurance                     $     500/year
Local advertising             $   600/month
Additional business licenses  $    300/year

Sharon plans to move the existing equipment from her garage to the new business. The existing equipment has an original cost of $15,000 and accumulated depreciation of $3,000. Straightline depreciation is used to depreciate all plant and equipment.

The situation described above is taken from a text book on management and cost accounting, an area of accounting which most practitioners carefully avoid. However, the circumstances as described are not unlike everyday problems of the typical small business client. To help these clients, it is necessary to understand various types of costs and how they relate to the planning and operation of a business.

One of Sharon's first considerations is just what will be the cost of expanding her business. In technical terms she is looking at "differential" or "incremental" costs. A differential cost is the difference in cost from one course of action compared to an alternative course. Upon review of the type of costs, Sharon may decide against the venture or she may be able to reduce or eliminate some expenses, for instance the purchase of the delivery truck. …

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