What is cost accounting?
The full costs methods consists in taking into account all costs incurred by the company, whether direct or indirect, fixed or variable.
The aim is to achieve an overview of all costs associated with the production of goods or the provision of services. This includes raw materials and labor costs, as well as indirect expenses such as energy, rent and depreciation.
It should be noted that some accounting software have built-in cost accounting features.
Cost accounting methods
Full costing
The full cost method consists of taking into account the whole costs incurred by the company, whether direct or indirect, fixed or variable.
The aim is to obtain an overview of all costs associated with the production of goods or the provision of services. This includes raw material costs, labor costs, as well as indirect expenses such as energy, rent and depreciation.
Calculation example : Suppose a company produces 1,000 units of a product and its costs break down as follows:
- Cost of raw materials : CHF 30,000
- Labour costs : CHF 20,000
- Indirect expenses : CHF 10,000
- Indirect expenses : CHF 10,000
- Full cost per unit : CHF 10,000 (Total costs / quantity produced)
ABC (Activity-Based Costing) analysis
ABC analysis is based on the allocation of costs according to activities that generate them. Rather than allocating costs on a general basis, each activity is analyzed and costs are then allocated according to the use of resources by these activities.
This method allows us to better understand which process is the most costly, and to identify areas where efficiency gains are possible.
Calculation example : If a company identifies two main activities to produce a product: assembly and packaging, it could allocate costs as follows:
- Cost of assembly : CHF 15,000 (75 % of time spent)
- Cost of packaging : CHF 5,000 (25 % of time spent)
If the company produces 1,000 units, the cost per activity would be distributed as follows:
- Cost per unit for assembly = 15,000 / 1,000 = CHF 15
- Cost per unit for packaging : 5,000 / 1,000 = CHF 5
The total cost per unit would be CHF 20.
Standard costs
Standard costs represent an estimate of costs for the production of goods or services under normal conditions. They serve as a reference point for measuring differences between actual and forecast costs. This method is used to identify inefficiencies and evaluate the performance of production processes.
For example, if the company has defined a standard cost of CHF 50 per unit for the production of a product, but actual costs amount to CHF 55 per unit, the difference would be CHF 5, indicating an additional cost which would require investigation to determine the cause.
Direct costing
This method only takes into account costs directly attributable to the production. These include raw materials and direct labor. Fixed and indirect costs are excluded from this calculation. Direct costing is often used to analyze the profitability of a product, enabling contribution margins to be calculated.
Calculation example : For a product, if direct costs (raw materials and labor) amount to CHF 40 per unit and the product is sold at CHF 60, the contribution margin would be:
- Contribution margin = 60 - 40 = CHF 20 per unit
Variable costs
Unlike fixed costs, which do not change as a function of production volume, variable costs fluctuate based on production activity. This method focuses solely on costs that vary directly with the level of production, such as raw materials or energy used in the production process.
Example: If a company finds that the cost of raw materials is CHF 10 per unit produced and production increases by 500 units, then the total cost of raw materials would be:
- Total cost of raw materials = 10 x 500 = CHF 5,000
Benefits of cost accounting
The accounting analytics offers many advantages for companies, whether they are large or small.
Better decision-making
Thanks to a detailed analysis costs, managers can identify the most profitable products or services and those that generate losses.
This makes it possible to make strategic decisions and informed decisions, such as cutting unnecessary costs or discontinuing unprofitable product lines.
Better decision-making
By accurately identifying direct and indirect costs, cost accounting helps companies to better control their expenses, to optimize use of resources and improve profitability global.
Improving efficiency
Using methods such as ABC analysis, companies can identify the most important bottlenecks in their production processes and take measures to improve efficiency.
In addition, standard costs and variances between actual and forecast costs can be used to measure the performance operations, facilitating continuous improvement of internal processes.
Optimizing sales prices
By understanding the precise cost of production per unit, companies can set competitive sales prices that maximize profit margins while remaining attractive to customers.
Conclusion
Cost accounting is essential for Swiss companies seeking to improve their financial management and competitiveness. Methods such as full costing, ABC analysis and variable costing provide a clearer understanding of a company's structural costs and optimize processes.
By adopting these practices, your company can not only improve its profitability, but also anticipate market trends and positioning strategically. Would you like to apply cost accounting in your company? Don't hesitate to request a quote at Fidulex.
