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What is cost accounting?

Cost accounting is part of business accounting. It serves to report, plan and control costs and revenues.
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Cost accounting in brief

Cost accounting is a sub-area of business accounting. It records all types of costs of a company and determines where and for what they have been incurred. In this way, it provides important information for planning and controlling costs and revenues, as well as for making operational decisions.

Cost accounting: tasks and objectives

The tasks of cost accounting and activity accounting lie in:

Recording of all costs and services
Cost calculation and unit cost evaluation
Control of a company's profitability, e.g., target/actual comparison
Provision of information for operational decision making

The main objective of cost and activity accounting is to compare planned costs (expected costs) and incurred costs (actual costs). Through this comparison, decisions made can be evaluated and justified. In addition, future business-related decisions can be prepared and influenced; cost analysis thus forms a necessary basis for the preparation of the business plan.

Cost accounting structure

Cost accounting is divided into cost element accounting, cost center accounting and unit cost accounting. Each of the types of accounting has its own objectives and tasks. They are described in more detail below.

Cost Accounting Step 1: Cost Element Accounting

Cost element accounting is the first level of cost accounting. It answers the question of what costs have been incurred and in what amount.

Costs can be structured in a variety of ways. Most of the time, this is done through factors or production functions.This is not only inefficient, but also harbors some dangers. Missing receipts, accounting errors or missing procedural documentation can result in fines if the tax office investigates.

Classification of cost elements according to production factors:

Personnel costs
Cost of materials
Capital costs
Cost of premises

Breakdown of cost components by function:

Production costs
Distribution costs
Administrative Expenses
Research and development expenses

In addition, there is usually a breakdown according to chargeability:

Direct costs
Overhead costs

Direct costs can be assigned directly to a product (cost object), such as direct material costs. They can therefore be transferred directly to Cost Object Controlling.

In contrast, overhead costs cannot be assigned directly to a product, such as rental costs. They must first be settled through cost centers before they can be transferred to Cost Object Controlling.

Cost Accounting Step 2: Cost Center Accounting

Cost center accounting is the second step of cost accounting. It has the task of distributing the overhead costs incurred to the corresponding cost centers. A cost center is understood to be an area of the company.

Cost centers can be subdivided in different ways:

Breakdown of cost centers by function:

Material
Manufacturing
Administration
Distribution
Research and development

Breakdown of cost centers according to areas of responsibility:

Human Resources
Marketing Department
Legal Department
Accounting

Structure of cost centers according to spatial conditions:

Locations
Offices
etc.

Cost Object Controlling Step 3: Cost Object Controlling

Cost Object Controlling is the last step in cost accounting. It combines the direct costs of Cost Element Accounting and the overhead costs of Cost Center Accounting and assigns them to individual cost objects: the products or services.

This makes it possible to determine the unit costs of a cost object and, therefore, whether the production and sale of this product is profitable.

Classification of cost objects according to products:

Product 1
Product 2
...

Breakdown of cost units by services:

Maintenance
Assembly
Delivery
...

Classification of cost objects according to orders:

Order 1
Order 2
Order 3
...

Cost accounting and cost analysis in the operational decision making process

An important function of cost accounting and cost analysis is to provide information for operational decision making, especially in the following areas:

Corporate strategy: the results of cost accounting are used by the company's management for the further development of corporate strategy, e.g. with regard to the choice of location.
Pricing policy: Cost accounting provides information on the costs and revenues of the various products. This also makes it possible to optimize product pricing.
Pricing policy: Cost accounting provides information on the costs and revenues of the various products. This also makes it possible to optimize product pricing.
Planning the production schedule: cost accounting can determine which products sell particularly well, which in turn provides important clues for planning the production schedule.
Process planning: Cost center accounting provides information on the success of operational production processes. In this way, process planning can be optimized.
Supply planning: The results of cost accounting are used to plan the supply of production factors, labor, operating resources and materials.
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