For many enterprises it is an essential tool to ensure profitability; for others, a wasteful and unnecessary complication.
If you’re interested in the potential benefits of cost accounting, the first thing we’ll do is to arrange a meeting to establish what you need. After that, we’ll spend as much time as it takes getting to know your business and meeting with you regularly to discuss our findings and suggest potential areas for improvement. If you’re happy with what we’re doing, we’ll move to implement those of our suggestions that suit your preference.
In each case, the way you choose to monitor your costs is up to you. We can report with a particular frequency, or you can take advantage of one of our real-time monitoring systems available in the cloud. These are fully customisable with any KPI that you might choose.
It may be that you want us to take a long-term interest in your cost performance, and this is where you’ll really see the benefits of our holistic approach. We perform best in situations where we can really get to know your company inside out and present evolving solutions that track and respond to the growth and diversification of an enterprise, using feedback from our own data collection systems to inform subsequent change.
Cost Accounting is a future-orientated process for analysing the outgoings of a company in order to predict the outcome of a particular course of action. It is commonly used by managers and directors to aid the decision-making process as part of Strategic Planning, and as such, falls under the umbrella of management accounting activities.
Broadly speaking, a company’s outgoings can be divided into variable and fixed costs. Variable costs tend to vary with the rate of production – labour, raw materials, distribution, and so on, whereas fixed costs – storage, depreciation, quality control, etc. – tend to remain constant. The shift towards high volume and heavy industries that occurred during the industrial revolution resulted in a sudden change in the way that costs were structured, with fixed costs taking a more prominent role as larger departments in divisions like maintenance and control were retained for when they were needed, regardless of the rate of production. Prior to this, variable costs represented the majority of a business’s outgoings, and managers were used to accounting for this using a rough estimate. Many businesses suffered as they failed to predict accurately the costs of a planned expansion or diversification. This situation holds for the majority of modern businesses too.
In addition to this, costs can be further subdivided; one major division being direct and indirect costs. Direct costs relate to a particular cost ‘object’; that is, a particular product or service. An example might be the paper used to print a book. Indirect costs, also sometimes called overheads (though this is not strictly accurate since some ‘overhead’ costs may not, in fact, be indirect), are unrelated to a cost object. They might include a monthly rate for site security, or overall administration costs for an office.
Aside from the ‘Standardised’ or ‘Standard Cost Accounting’ described above, there are a wide variety of Cost Accounting Approaches. A selection of these are briefly described below.
Activity-based costing (ABC) involves the identification of specific functions of a business (activities) and the establishing of a breakdown costing for each one. The approach has fallen out of favour since the 1990s as it is considered time-consuming and inefficient. ABC is a purely observational practice. It makes no suggestions about solutions to a particular problem of cost, but it can help to identify unexpected flaws in operational strategy and redefine some indirect costs as direct costs.
Aside from the obvious need that we all share to preserve and protect the planet’s resources for future generations, many companies now have a legal responsibility to account for their impact on the environment. Environmental accounting analyses and attributes costs that arise from environmental taxes, clean-up of contaminated areas, disposal of waste and so on. An environmental accountant might suggest alternative modes of operation that reduce these costs, such as recycling, carbon trading, and so on.
Pioneered by the Japanese car industry at the end of the Second World War, lean manufacturing is a mode of operation that aims to maximise efficiency through the development of rapid, precise processes that are easy to understand, and to free up capacity in production. In the wake of the success of Toyota in employing this strategy, it has been widely adopted across a variety of industry sectors. Lean accounting employs the same principles. It supports and promotes lean practices in the way that information is collected and presented in a useful, easy-to-understand form, and geared towards performance indicators that relate to lean functioning.
Lifecycle costing analyses the entire lifecycle of a product from the extraction of raw materials to the costs of production, distribution, maintenance and disposal. Aside from its use in assisting with price-point determination, lifecycle costing is also frequently employed to assess the environmental impact of a product.
The Target Cost of a particular product or service is the maximum cost of production acceptable when it is sold at the expected price. It ensures a particular profit margin during ‘full stream’ production and is calculated by subtracting the desired profit margin from the expected market price. Target costing activities may also involve advice on ways to reduce production costs by improving processes, changing suppliers or increasing production volume.
Resource Consumption Accounting
Based in some part on the German Grenzplankostenrechnung (GPK) or ‘Marginal Planned Cost Accounting’, which imposes strict controls on the way internal, service, saleable and proportion costs are allocated, Resource Consumption Accounting differs from other cost accounting models principally in its view of resources as the foundation of all the revenues and costs of a business. Fundamentally, it takes a causal approach to financial phenomena and attempts to explain and predict from sound principles derived solely from operational data.
A management accounting technique that focusses on increasing the throughput of a company, Throughput Accounting is intended to provide simple, easy-to-implement solutions to problems that prevent an organisation from performing as desired. Throughput is defined as the rate of production of ‘goal units’, often simply ‘profit’, but equally anything else that relates to a particular goal, and focusses on encouraging decisions that increase a company’s value. It also focusses on the eradication of so-called ‘bottlenecks’ (also known as constraints) that restrict throughput.
Communications with HMRC & Companies House
Self Assessment Tax Return
CT600 (Company Tax Return)
Monthly Management Accounts
Accounting Systems Set-up
Business Startup – Company Formation
Benchmarking and KPI’s
Virtual / Part-Time Financial Director / CFO
Non-Executive Director (NXD/ NED)
Disaster Recovery Systems
Monthly / Quarterly / Annual Performance Meetings