Cost accounting

Cost accounting or cost accounting, also known as analytical accounting, is an accounting technique that aims to create an information system that allows knowing the cost of manufactured products.

Cost accounting

It is an instrument that supports financial accounting, studying the cost structure in companies. Cost accounting consists of making a reasonable allocation of direct and indirect costs that allows obtaining analytical information on which to support the decision-making of the company’s management.

Although both cost accounting and financial accounting are useful in the management of a company, cost accounting is information used only by company personnel, while financial accounting is information that can be used both by external users and by internal users.

Objectives of cost accounting

The information of the cost accounting is directed to the management of the company. It involves the assessment, analysis and control of the entire production process that makes up the business operation.

  • Determine costs: What allows to value assets and results.
  • Analytical objective: Cost accounting allows planning and control of business management, preparing budgets and preparing information that allows evaluating performance and thus taking the necessary measures.

How are accounting costs allocated?

Not all costs can be distributed in the same way to all manufactured products. Depending on the relationship with production, different types of costs are obtained that allow the units produced to be valued:

  • Direct allocation: The purchase price of raw materials and services consumed directly attributable to the unit. They are those related to direct costs, which are those that can be measured and unequivocally assigned to a specific product (for example, in the manufacture of ice cream it would be the cost of the milk cream or the cost of the cookie waffle).
  • Indirect allocation: They are the part that reasonably corresponds to the costs indirectly attributable to the product. These are those related to indirect costs, which are affected by different processes and do not allow a viable exact measurement of the quantity consumed for the manufacture of each product (for example, factory rental, which of the goods produced is Is it a higher percentage? Are they all the same?).

Functions of a cost accounting system

A good cost accounting system allows:

  • It allows to know the efficiency of the production system.
  • Control the expenses generated in each phase of the production process.
  • Obtain the benefit of each unit produced and allow making decisions about what and how much to produce.
  • Detect and analyze deviations from what is planned to establish control mechanisms.
  • It allows to value the inventories of the company.

Cost accounting example

Suppose a company that produces yogurt and the total cost of unit production is 0.10 euros. In addition, it produces 10,000,000 units per month. The cost of paying employees represents 10% of the total monthly cost per unit produced and operating expenses are another 10% of this cost. Calculate the monthly cost of the company.

The volume of the total cost of sales is 10,000,000 units * 0.10 unit cost of yogurts = 1,000,000 euros.

Employee pay = 1,000,000 * 10% = 100,000 euros.

Operating expenses = 1,000,000 * 10% = 100,000 euros.

The total monthly cost will be 1,000,000 + 100,000 + 100,000 = 1,200,000 euros.