The benefits of cost accounting
Cost accounting is a valuable decision-making tool for executives and managers alike. Coming from general ledger accounting, this accounting method provides a detailed view of all company costs, and identifies the cost of each production. Discover in this article the definition of cost accounting and its benefits.
15 September 2023
What is cost accounting ?
Cost accounting is an accounting information system designed to explain a company’s financial results. Whereas general accounting provides a global view of the accounts, the analytical method focuses on each activity in detail. This tool is different from financial accounting, where analysis results aren't intended for external publication.
This technique enables us to break down costs and revenues to gain a better understanding of the costs of each corporate function (production, marketing, etc.) As a key tool for calculating costs and margins, cost accounting provides decisive insights for management. Even though, there is no legal requirement for cost accounting, it remains the benchmark for budgetary control.
Cost accounting : what are the benefits ?
Understanding and optimising costs
Cost accounting, also called management accounting, provides a clearer picture of the costs incurred by a company, by listing them according to their nature. By detailing each expense, exhaustively, it reveals the real unit cost of any service or product.
Cost accounting software also simplified both data collection and processing. These software packages enable customized cost objects to be set up to meet a company’s specific needs. It is also possible to check whether the costs center under study is generating profits or accumulating losses, in real time. The use of cost accounting software provides support for the detection of bad practices and deviations, with a view to taking corrective action. The company thus retains full control over the allocation and use of its economic resources.
Providing an in-depth analysis of each activity, the analytical approach enables you to dissect the associated break-even point. This makes it possible to calculate the profit margin for each order, project, or customer, or even to analyze cost centers whose profitability is usually difficult to measure (marketing, finance, etc.). With detailed data in hand, the company can reorientate its activity or redirect its efforts towards a particularly promising project. Various methods can then be used to choose an analytical plan that will contribute to profitability.
- The total costs method compares profits with product costs, incorporating both direct and indirect expenses.
- The standard costs method is used when the company defines its margins in advance and draws up its budget forecasts accordingly.
- Variable costing is used to determine the break-even point, taking into account only those expenses directly related to the company's activity.
- The direct costing method integrates both variable and direct costs to establish a more precise break-even point.
- The ABC method (Activity Based Costing) divides the company by activity rather than by function or product. Based on the notion of value, this approach favors activities offering the best profitability.
Cost accounting enables every company to study its costs from multiple angles. Based on general ledger accounting, it supplements this data by providing the basis for evaluating a number of balance sheet items (valuation of inventories, assets, etc.). This measurement system, which is specific to each organization, serves as the basis for both budget forecasting and performance reporting. Neutral and objective, cost accounting is an essential decision-making tool.
Useful for improving management, in-depth knowledge of costs enables you to manage a product portfolio more efficiently or set more competitive sales prices. To improve strategic decision-making, it is essential to collect relevant, up-to-date data, which is why cost management tools and cost accounting software have been deployed.