Discovering Analytical Accounting

Managing your company budget can be complicated, especially if you struggle to keep track of expenses within your business.

When did you pay for what? Where and for what were the various costs incurred? What was the revenue for each sale? Which production is worth incentivising, which would be better to replace?

If you are asking yourself all these questions, you should start by familiarising yourself with the concept of cost accounting. This branch of business accounting provides the basis for the operational planning of costs and revenues for every business.

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What is cost accounting?

Definition

Cost accounting, also known as cost, industrial or internal accounting, is a system for evaluating the costs and revenues associated with a specific production process within a company. It corresponds to a process of recording, integrating, classifying, analysing and evaluating the data relating to the object of investigation in relation to the costs it has determined for the company and the revenues it has brought to it.

Its purpose is to enable company management to optimise individual production processes. In fact, cost accounting monitors the profitability of different business sectors in order to weigh up whether the actual productivity corresponds to the expected productivity.

What elements constitute cost accounting?

Cost accounting differs from other accounting systems available in companies because:

• It can be based on both actual (a posteriori) and budgeted (a priori) data ;
• It is not subject to time limits, but is timely: it must always be carried out close to a management decision. In other words, it must always provide recent and up-to-date information;
• It is implemented by purpose and not by nature;
• Its use is optional: unlike other accounting systems, it is not required by law.

☝ While cost accounting remains a non-statutory system, this does not mean that it is not important. On the contrary: especially in today's competitive markets, it has, on the contrary, become practically indispensable. In fact, cost accounting enables the implementation of strategic management methodologies and, by also ensuring constant optimisation, forms the basis for the success of a production solution.

How does cost accounting work?

Cost accounting, like any process, is carried out in stages. Below is an overview of the main steps.

1. First of all, cost accounting works from a collection of data (data from general accounting can also be used). From this, it is necessary to collect and select the costs and revenues relating to an individual product, service or business process and to analyse them.

2. For these data to be correctly analysed, they must first be classified, i.e. defined as direct, indirect, fixed, variable, production or non-production costs, etc.

3. They must then be integrated, i.e. they must be related to a specific cost centre or a specific job order.

4. Now we can move on to the actual analysis of the data. In contrast to general accounting, in cost accounting, costs are not analysed with reference to parameters by nature such as raw material, labour, processing, etc. The costs are, instead, studied by reference to the cost centre.

Instead, costs are studied by purpose, i.e. according to their business function. This means that costs are not considered on the basis of the economic cause that led to the cost in the first place. Instead, they are considered according to their application in certain management areas of the company.

5. Finally, a conclusive evaluation of the business costs is to be carried out. This is to be done by comparing the costs incurred in a certain (chosen) period with the quality and quantity of the production that took place in the same time period.

Cost centres and orders

In cost accounting, costs and revenues are analysed according to certain cost centres and/or job orders. But what do these two formulations mean?

The cost centre (C.o.C.) constitutes the business unit in which the costs taken into consideration have materialised. In short, it is a business area in which the costs taken into account for the analysis were formed. The cost centre may take the form of a department or organisational unit.

The job order generally indicates a certain work carried out on commission from a customer. It may be chosen as an alternative to the cost centre as a basis for data analysis, but may also be taken into account in a complementary manner to it. The study of data from the order also allows feedback on the degree of success of the sale at a certain customer.

Objectives of cost accounting

By analysing the revenues and costs of a certain business process, as well as its financing flows, cost accounting pursues the fundamental purpose of assessing

• The efficiency in the use of the resources used to realise a given product, in order to avoid possible waste;
• The effectiveness of the company's solutions related to the production of the same product in terms of quality, quantity of resources used and time spent.

In addition, cost accounting is very useful for:

• Providing information regarding the management of the product/service/process under consideration;
• Enabling its management to be optimised and its profitability to be increased through reliable and timely evaluations;
• Enables business processes to be kept under control;
• Channels company management towards appropriate decision-making processes;
• Ensures optimal management control of the entire business by incorporating appropriate economic, asset and financial measures.

General and cost accounting: what is the difference?

General accounting differs from cost accounting in several respects. Firstly, general accounting serves as the basis for the preparation of certain legally required business documents, such as profit and loss accounts and balance sheets. In contrast, cost accounting is an optional practice.

Secondly, the two types of accounting differ in the direction imposed on the data collected. General accounting, also called external accounting, collects data for entities outside the company (lenders, suppliers, shareholders, creditors, etc.). Analytical, or internal, accounting, on the other hand, reserves them for its internal management.

Thirdly, there is a difference in relation to the quality of the data analysed. In fact, general accounting uses data by nature, i.e. data referring to the production factor for which the cost was incurred. Analytical accounting, on the other hand, focuses on data by purpose, i.e. costs that are classified according to their use.

In addition, by looking at the overall performance of the company, general accounting provides an overall financial perspective. Analytical accounting, on the other hand, makes it possible to verify the economic performance of the individual business factor under consideration.

Finally, general accounting applies to a time span of one year, whereas cost accounting is not subject to limitations.

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Cost accounting: why is it important for companies?

Cost accounting is not bound by legislative requirements, but has a voluntary character. This means, that it is up to the company to decide whether and to what extent, with what methodologies and in what perspective it wants to apply this system of evaluating business expenses.

However, for any company wishing to be competitive on the market, it seems to have become indispensable to apply the cost accounting system.

Cost accounting, in fact, gives companies access to up-to-date and highly accurate data on business costs and revenues. Not only that, it also allows them to identify and adopt the best strategies for the company, so as to ensure maximum profit with minimum effort. It allows you to optimise production processes and reduce waste, just as it allows you to prevent possible problems and formulate a possible solution to them in advance.

Dedicating oneself to the strengthening of one's own accounts department is therefore cost-effective. In fact, it is a compulsory choice for any company that wants to make a quantum leap.

If, however, you lack the time and resources to afford your own industrial accounting department, you can always hire an external controller. This will help you examine your business situation in accordance with the objectives you want to pursue. He will then provide you with a set of data on the current performance of your business together with forecasts on possible future performance.

Have you convinced yourself to implement your own accounting department? Good idea! Your effort will pay off.