Cost Accounting: What it is and how to do it

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What is Cost Accounting?

A cost accounting is the area of ​​accounting that deals with the expenses incurred in the production of goods or services. In a more technical way, we can define it as the accounting record of the company's production operations, through the costing accounts, which can be divided into:

  • Accounting for Costs of Services - expenses incurred in rendering services
  • Accounting for Industrial Costs - expenses incurred in the production of products

Its main objective is to determine the costs of the products and / or services sold and should be a tool to support decision-making, especially in the formation of the selling price of the company.

Contribution Margin Worksheet and Point of Equilibrium

Accounting

It is within a larger scope of General Accounting study, which is the science that uses a number of techniques and calculations to keep track of a company's equity. Regardless of whether you know how to do it or not, you need to present details of the financial and patrimonial evolution of your company over the years. Usually this calculation and demonstration is done by your accountant, but it does not hurt to understand and stay on the subject.

To learn more about the topic, see an article on Accounting!

Types of Costs

Basically there are two types of costs, direct and indirect costs:

  • Direct Costs - they are objectively linked to the production of a product or service

Example: In a brewery the bottles, lids, labels and liquid are direct costs, because for each beer produced, if you have an extra expense with these items

  • Indirect costs - are costs that are not directly identified in products and services

Example: Expenditures with the financial, marketing and management teams within the same industry would be considered indirect costs

In the case of indirect costs, in some cases it will be important to carry out apportionment criteria between products so that they are properly allocated.

PS - direct and indirect costs can sometimes also be called fixed and variable costs.

Contribution Margin Worksheet and Point of Equilibrium

Main Costing Methods

I say this, because it is precisely the costing methods that will allow you to understand how to divide the costs of your business between products:

  • Absorption Costing - As its name already says, in this method all costs related to the manufacture of the product or provision of the service are absorbed, regardless of whether it is a direct or indirect cost. Thus, the expenses are distributed (prorated) for all products or services.
  • Direct or Variable Costing - In this case, only the variable production costs of the period are considered. Fixed costs (relative to production), because they exist even without the development of products or services. In short, this costing separates costs into variables and fixed costs. (obs - it is not accepted in external statements for hurting one of the accounting principles accepted in Brazil)
  • Activity Based Costing (ABC) - This method uses the criterion of activities that were performed and generated some type of cost to make the allocation of costs between developed products or services rendered.

Cost Accounting - ABC Costing

Ultimately, the costing method that makes the most sense for your business should be used, and depending on your business, it may even make sense to use a specific costing method. Now let's take a step-by-step look at how to apply cost accounting to your day-to-day business.

How to do cost accounting

  • 1 step - List all the costs and expenses that exist in your company
  • 2 step - Separate the direct costs for each product
  • 3 step - Compare the direct cost of this product with the applied selling price

If the direct cost is higher this product does not have contribution margin, that is, it will not contribute to pay indirect costs (also called fixed costs)

If the selling price is greater than the direct cost, move on to the next step

  • 4 step - Provision of indirect (fixed) costs between products

There are some ways to do this costing. We discuss some of them more in the same article. If you do not have data that will allow a "fair" split, a simple way that can give you a notion is by making the percentage of sales of each product and making a balanced division of costs between them

With the apportionment made and the contribution margin understood, you can identify how many units would need to be sold from each product or service to match revenues and expenses. If you only have one product, the calculation of the break-even point is easier to do.

Cost Accounting - Point of Equilibrium

  • 6 step - Based on the previous 5 steps, work out the best sales price formation for your business and redo the steps if necessary.

Contribution Margin Worksheet and Point of Equilibrium

Practical example

  • 1 step - To list the costs I'll use a toy store with 3 different products:

a) Product 1 - cost of R $ 100 per manufactured product and sale price R $ 200

b) Product 2 - cost of R $ 150 per manufactured product and sale price R $ 300

c) Product 3 - cost of R $ 70 per manufactured product and sale price R $ 50

d) Employee Salary - R $ 20.000

e) Rent and other expenses - R $ 10.000

  • 2 step - Now, just look at the direct costs (you can forget the indirect ones for now)

Product 1 (R $ 100), Product 2 (R $ 200) and Product 3 (R $ 70)

  • 3 step - The calculation to find the contribution margin (MC) is very simple: MC = Selling Price - Direct Costs

a) Product 1 - MC of R $ 100 (200 - 100)

b) Product 2 - MC of R $ 150 (300 - 150)

c) Product 3 - MC of - R $ 20 (50 - 70)

In our case, a good insight we could have would be to take the 3 Product out of the market or modify its selling price, since in the current scenario it only damages the company.

  • 4 step - Now is the time of the apportionment

Indirect Costs = R $ 30.000 (10.000 + 20.000)

In this case, as we have shown, there are some forms that can be used. Assuming we used a proportional method according to the contribution margin of each one, we would have the following scenario (see that I already removed the 3 product from the account.) If it still were, the sales number would probably have to be larger according to the loss calculated by him):

a) Product 1 - Provision of 40% (Product MC 1 / Total MC = 100 / 250 = 0,4 = 40%)

b) Product 2 - Provision of 60% (Product MCNUMX / Total MC = 2 / 150 = 250 = 0,6%)

In this case, 40% of 30.000 = R $ 12.000 for sales that the 1 product will need to make and 60% of 30.000 = R $ 18.000 that the 2 product will need to sell to reach its equilibrium point

  • 5 step "Now we'll see how to get the amount that should be sold." The calculation is also simple, Point of Balance = Fixed Costs (Indirect) / Contribution Margin

In the case of 1: Balance Point P1 = 12.000 / R $ 100 = 120 1 products need to be sold to break even

In the case of 2: Balance Point P2 = 18.000 / R $ 150 = 120 2 products need to be sold to break even

  • 6 step - Now supposing that the company internally believed that it would be impossible to sell (or manufacture) 120 products 1 and 120 products 2. In this case, the formation of the selling price should be questioned in order to understand whether it is possible to achieve better contribution margins and, consequently, to reduce the quantity of products needed to match.

Obviously, all the effort we've taken was to find the point where the revenues and expenses are the same and if you have a business, you will think about how to make a profit after finding that value.

Contribution Margin Worksheet and Point of Equilibrium

Had he looked at the bookkeeping that way?

I do not know about you, but I've seen a lot of people who are averse to the word accounting, because it looks difficult and messes with a lot of numbers, calculations and statements, but the truth is that if you do not stick to the more technical definitions, process of cost accounting is nothing more than a calculation of your expenses that you can do yourself without any difficulty.

To close, it is worth remembering how this analysis helps in the formation of sale price and in decisions about the pricing of its products, services and choice of how to position itself in the market.

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29 COMMENTS

  1. Hi, Deise, can we
    so
    b - we are a small company, who performs this function is one of the partners of the company
    c - we divide expenses and expenses into more important account groups
    d - yes, we also use the calculations to make time comparisons of expenses and make cost reduction plans
    and - we do not make this type of apportionment
    f - we evaluate it as important, since it helps us to maintain financial health and avoid unnecessary losses

  2. I'm doing a college job and need to interview some company, could you please be my interviewee and answer the following question:
    The. Does the company carry out cost control?
    B. Who performs this control? Is there a specific department?
    w. Does the company make calculations to know the cost of the procedures it performs?
    d. Are these calculations used for decision making in the company, for example, to calculate the price to be charged for a procedure?
    and. What are the most used criteria for apportioning indirect costs? For example: hours worked, area occupied, among other criteria.
    f. How does the company evaluate the importance of controlling costs in its management process?

  3. Hi Eloise,

    in fact, the contribution margin is calculated using the selling price minus the costs (does not necessarily need revenue)

  4. The sale of its production (5.000 units) in the month of March at the unit price of R $ 17,00, having as variable costs: Raw material in the total amount of R $ 35.243,00 and Electric Energy in the total amount of R $ 20.507,00. Based on these data determine the value of the Total and Unit Contribution Margin. Until now I understood more to calculate the margin of contribution I need to know which is the volume of the revenue; and that ne? I can not get there! If you can help me, thank you!

  5. Hi Eloise, I think some information was missing. In any case, it would be important to clarify your doubt regarding the proposed year

  6. Good evening Rafael, Congratulations on the article!
    Could you help me with this research?

    Indústria Ferreira e Ferrari SA is a company with forty-eight years of existence that produces toys for boys and girls from all over Brazil. However, the management of the company was always carried out by Mr. Ferreira, who was always methodical and focused, and believed that "in the team that is winning does not move." In this way, Mr. Ferreira never changed, literally, and also did not allow changes in his factory. Now that Mr. Ferreira has retired due to old age, his sons have taken over the company and hired you to help with production management. For this some information was raised regarding the production of plastic cart which represents 90% of the company's demand, which for next year is 60.000 units (5.000 units / month).

  7. Hi Claudemir, I suggest you seek the edict with the content that will be charged in the exam and search in handouts, books, courses and contents of google even what is necessary to do the test well. Remember that this test has probably happened in the past, and pursuing the old questions can help you to direct the study.

  8. 24 has been completing the Technical Course in Accounting, I have completed a registration to run for a Public Contest in the area of ​​Accounting is worth remembering that the contest has only one vacancy what should I do to prepare myself?
    The proof is on 18 February of 2018

  9. Hi, Patricia, I can. In my opinion it is essential for any business, being one of the bases of any business management. The idea is that if you have a business, you need to sell something and this thing has costs attached. If there is no tracking of this indicator, you may be putting your entire business at risk. That's why it's important and making good management of it can allow you to find out exactly where to reduce spending, how to have the best approaches, and finally, how to have a financially healthy company. About the problems, it will depend a lot on type of company for type of company, but would say that having a correct calculation and keeping track of the cost changes you have are problems faced by many business owners / managers.

  10. Good afternoon Rafel, first of all congratulations on the article!
    Will you be able to help me with my research, giving your opinion on the importance of cost information for business management and what are the main problems we can find today for cost control?

  11. Hi Popart. it may not have been clear on the chart, but actually what we have in it is that the y (vertical) axis represents the values ​​of revenue and the two lines that appear there, the expenses and, therefore, appears the name profit or loss in relation to these lines.

    Anyway, thanks for the feedback and for sending the new graphic, which is also very explanatory

  12. Hi Sergio,

    apportionment basis is a way of dividing costs according to established criteria. You can prorate a cost according to the area of ​​the company used, amount of employee, energy or input used or any other criterion that makes sense for your business.

  13. Hi Wagner, thanks for the feedback. I believe it will depend on the type of company, anyway, I will leave your opinion for a future post

  14. The article is good, but it does not reflect the reality in the companies and the reason is because we can not prorate the fixed costs / expenses for the products. It is completely unfeasible to do this.

    Wagner Pelizaro

  15. Hi Alessandra, cost accounting is just a name to denominate the costing within accounting. That way, in accounting itself you will have aspects of cost accounting being used as the cost classification and apportionment methods used understood?

  16. Good afternoon, Rafael!

    How are you?

    With the balance sheet, can you identify whether the company applies cost accounting? Is cost accounting different from accounting by cost center?

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