Cost ac­coun­ting – old hat?

The heyday of managing companies on the basis of cost accounting is long past. Cost accounting reached the height of its popularity in the 1960s, when the idea was to set up cost planning per cost centre and to juxtapose actual costs against planned costs or target costs. Still: cost accounting (also known as cost and performance accounting or cost and earnings accounting) continues to be an important cost management tool which provides important pricing information. The widespread use of SAP software means that cost accounting is pre-integrated into financial and other company accounting. This standard software package also generally prescribes the use of a flexible budgeting approach.

Although many fundamental questions have been resolved, there are a number of levers and key issues:

• Role in annual budgeting: for decentralised companies where budgeting has a significant bottom-up component, budgeting at the cost centre level continues to be important. Centralised companies managed in a top-down fashion, on the other hand, break down their parameters as specified by head office to the level of units of responsibility. The focus lies on implementing and concretising the overall objective. How should the budgeting role of cost accounting be defined?
• Basis for allocating costs to functions, processes and products: is there transparency and clarity regarding how costs are allocated to functions, processes and products? The allocation keys and yardsticks used for overheads have to be intuitively comprehensible. Simplicity and acceptability for managers are more important than absolute precision.
• Use in regulatory proceedings: cost accounting can be used to justify the allocation of costs to products and processes under regulatory supervision. However, it requires that the allocation calculations be based on generally accepted business principles and that they align with the data reported in financial statements.
• Role in pricing: the benefit of cost accounting is that it provides a standardised and automated way to allocate resource consumption to individual products and other objects, with monthly reporting. How can customer profitability be calculated as part of an ongoing process, taking into account the specific services consumed by customers? How can full costs, possibly even variable costs, be used to generate price lists or quotations in combination with customer and competitor assessments?
• Role in internal management based on transfer pricing: can cost accounting be used to calculate transfer prices for products and services supplied and consumed internally? Do cost-based transfer prices gain acceptability when cost accounting is used or does the complexity of the cost accounting system mean they are rejected as being too opaque? Should internal settlement in management accounting be integrated into cost accounting or should market products simply be accounted for at cost?
• Structure of cost accounting: how do the number and degree of detail of cost centres and cost types support the trend towards top-down control? In the case of groups with multiple subsidiaries, how does one ensure that internal settlement does not distort the information provided by cost accounting? Is the vision of a single cost accounting system covering multiple legal entities realisable? How does one ensure that management-relevant information is available at the level of functions, processes, cost units and customers?

CTcon will assist you in identifying customised solutions to these questions as well as in structuring your cost accounting to meet your specific needs. We have a long track record working with numerous large enterprises. An important success factor when structuring cost accounting is to ensure that it is compatible with the company’s management and steering approach. If required, CTcon will help manage IT implementation carried out by the client company itself or by an IT consultant.