Cost accounting: understanding where you make money

The financial statements tell you whether the business as a whole makes or loses money, but they do not tell you where. Which product pays off? Which customer costs more than they bring in? Which department burns margin? These questions are answered by cost accounting (also called managerial or industrial accounting): a management tool that the Code of Obligations does not impose, but which often makes the difference between deciding by gut feeling and deciding with the numbers.

General and cost accounting: two perspectives

General accounting (financial accounting) serves to produce the balance sheet and the income statement in accordance with the CO, for the tax authorities and third parties. It classifies costs by nature: personnel, materials, rent, depreciation.

Cost accounting reclassifies the same costs by purpose: how much it costs to produce that good, to serve that customer, to keep that department open. It is internal, not mandatory, not standardised: it is built around the needs of the business.

Direct and indirect costs

The fundamental distinction is between:

• Direct costs: attributable without ambiguity to a product or service (the raw material of an item, the labour of a specific job).
• Indirect costs (overhead): common to several products, to be allocated using criteria (rent, administration, management, general depreciation).

The challenge of cost accounting lies precisely in allocating indirect costs in a sensible way, through allocation bases (machine hours, labour hours, square metres, volumes) or more refined methods such as activity-based costing, which charges costs on the basis of the activities that generate them.

Cost centres

The operational core is the cost centres: units in which costs are grouped by area of responsibility or function (production, logistics, sales, administration). By attributing revenues and costs to the centres, you see which ones generate value and which absorb it. In more structured organisations, these are joined by profit centres, which also have their own revenues and whose result is measured.

The contribution margin

One of the most useful indicators is the contribution margin: the difference between a product’s revenue and its variable costs. It is how much that product “contributes” to covering fixed costs and generating profit.

Thinking in terms of contribution margin overturns many intuitions:

• a product with low net profit but a high contribution margin can be valuable, because it covers fixed costs that would exist anyway;
• eliminating a “loss-making” product can worsen the result, if its margin was covering part of the fixed costs that remain.

From this you can also calculate the break-even point: the sales volume that covers exactly all the costs.

What it is for in practice

Good cost accounting makes it possible to:

• price products and services correctly, starting from the real cost;
• identify unprofitable products, customers or jobs;
• assess whether to make or buy;
• build reliable budgets and monitor the variance against actual figures;
• steer investment towards the areas that pay off most.

For a service business, the same principle applies to hours: how much an hour of work delivered costs, at what rate it should be sold, which jobs erode the margin.

Where to start

You do not need a complex system from day one. You start by defining a few clear cost centres, separating variable and fixed costs, and linking the data to the existing general accounting. Sophistication grows with the business: what matters is that the numbers are consistent and up to date, not theoretically perfect.

In summary

• General accounting tells you whether you make money; cost accounting tells you where.
• Distinguish direct and indirect costs; allocate overhead with sound criteria.
• Cost centres show who creates value and who absorbs it.
• The contribution margin guides pricing, product mix and break-even.

How we help you

We build tailored cost accounting systems for SMEs: cost centres, contribution margins and reporting that links the management data to the general accounting. Find out where you really make money.