Guide to cost accounting: definition and method

Do you wear glasses? Sunglasses? Either way, you know there's a world of difference between "before" and "after" cleaning your lenses. Cost accounting is a bit like a cloth you run over the lenses of your accounting.

Once that's done, you see everything more clearly. And with the added clarity that cost accounting brings, you also gain a better understanding of your company's costs and profitability drivers.  

To help you see cost accounting more clearly, here is our summary of its fundamentals. We have put together a complete overview for you, including: 

• the essentials you need to know about cost accounting; 
• the steps to follow to adopt cost accounting; 
• which cost accounting axes to choose.

Everything you need to know about cost accounting 

What is the difference between financial accounting and cost accounting?

Financial accounting and cost accounting are two distinct disciplines. 

Financial accounting is a legal requirement. It provides an overall view of the company's financial position, by period or by year. It takes the form of the balance sheet and the income statement, among others. 

Financial accounting is also intended for use outside the company. Cost accounting, because of its value for steering the business, is used purely internally.

What is cost accounting?

Cost accounting consists of classifying, reporting and analyzing expenses and income according to your company's needs. It is nonetheless based on financial accounting. 

As mentioned above, cost accounting is optional. However, the fine-grained control and insight it provides make it essential for any company that wants to improve its management. It offers a very deep level of analytical granularity.  That's why it is a powerful strategic and managerial lever, especially when combined with reporting. 

Its analytical axes make it an excellent basis for analytical reporting. This type of reporting is inseparable from a detailed understanding of your business.  It brings additional insight, particularly into profitability by product, service or entity.  Read our article on analytical reporting for a detailed look at its benefits.

Why adopt cost accounting? 

As experts in corporate performance management, here are what we see as the 3 most notable benefits of cost accounting. 

• Profitability tracking. This is the main benefit of this type of accounting. After all, what company would pass up the chance to tell its profitable items from its loss-making ones?! 
  
  
• Control over costs and revenue. On the one hand, cost accounting lets you pinpoint the costs to streamline and the possible savings where relevant. On the other hand, cost accounting also takes you to the heart of revenue analysis.
  
  
• Early detection of opportunities or problems.  When used as the basis for reporting, cost accounting provides closer monitoring. Problems and opportunities are spotted as early as possible. 

In short, cost accounting lets you truly understand your company's relative performance. 

What are analytical axes? 

Analytical axes are inherent to cost accounting. They support strategic decisions by adding a level of detail to accounting data.  

• products;
• service offerings;
• departments;
• stores; 
• geographic areas;
• or business units. 

For each of these axes, analytical codes must be created. They link the possible values to the analytical axis concerned. For example, if a company has several stores, the store analytical axis will be split into Brussels, Lyon and Ghent: the company's 3 stores.

Analytical axes are very important. They are what you build effective management reporting around, because of their role in tracking your company's activity and profitability. 

How do you adopt cost accounting?

Does cost accounting sound like the right option for you? We have prepared the steps to follow to adopt this method successfully. 

1. Define your analytical axes 

• Do the analytical axes let you track the KPIs that stem from the company's strategy in more detail? 
• Which angles of analysis do you need: by project, by activity, by product type, etc.?
• How many analytical axes are truly meaningful for analyzing your profitability? 
• Which analytical axes are required to meet the needs of the different departments, products or entities? 

2. Find the right tool 

Our customers sometimes tell us they got stuck in their cost accounting efforts. The reason? Not enough analytical axes available in their accounting and/or reporting solutions. To avoid this trap, make sure you choose your solution based on the analytical axes you will need.

Designed by a CFO for CFOs, EMASPHERE handles up to 10 analytical axes. Thanks to its connections with many accounting software packages, the solution pulls information directly from your accounting tools. 

3. Create an analytical axes "bible" 

Once your analytical axes are defined, it's time to bring them together in a "bible". 

• the analytical axes; 
• the items in each analytical axis, meaning the code and label of each analytical code.

Once formalized, this document should be shared with the employees and/or teams responsible for entering invoices. Each type of income or expense must be clearly linked to a dedicated analytical axis.  The goal is simple: leave no room for ambiguity when coding entries.

4. Work your analytics through reporting

Once you have completed these three steps, make the most of cost accounting. To do so, adopt analytical reporting. 

• creating the analytical levels in your accounting software;
• entering your invoices according to your analytical "bible".  

Based on the data obtained via the connection to your accounting software, EMASPHERE turns the data into management indicators.

Combined with the drill-down feature, EMASPHERE analytical reporting lets you decode your accounting entries. In a single click, you can access the details behind your figures from any accounting entry. This also applies to figures from your analytical axes.  

To support your analytical reporting, EMASPHERE also lets you choose from 50+ preconfigured, customizable indicators. They require no technical expertise and let you tailor your reporting to your company's needs.  

Which analytical axes should you choose?

• the most frequently used analytical axes; 
• the most common analytical axes in a selection of industries.  
  
  

The essential analytical axes

• The product axis is particularly useful for companies that offer different products or services. It gives a detailed view of the profitability of a product or service. 
• The department axis is especially insightful for companies organized into departments (marketing, production…). 

Which axes should I choose for my cost accounting? 

Without ignoring the specifics of each company, business model or industry, here are the combinations of analytical axes we frequently see among our customers. 

To guide you as well as possible, we have grouped them by industry. Keep in mind, though, that these analytical axes are not a prescription. They are based on our experience. 

Retail: 

• products;
• product ranges;
  In EMASPHERE, this is done with the analytics grouping feature, in a single click. 
• points of sale;
• countries (particularly for groups).
  
  

IT and services: 

• countries; 
• products or services; 
• departments (support functions, consultants or operating units, etc.); 
• sales channel (for example: direct or indirect sales).

Medtech / biotech:

• products; 
• projects;
• departments (R&D, clinical, quality and assurance, operations/production, sales, marketing, logistics, etc.).

Going further with cost accounting

Well done: you now have a clear picture of cost accounting. To get the most out of it, the next step is obvious: read our article on the synergies between cost accounting and reporting. There you will find a detailed look at the benefits of analytical reporting.