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