Learn how the exercise files are organized and what type of exercise files have been provided—mainly templates for going through the cost accounting work for your company.
- Let's start by defining cost accounting. Cost accounting is a practice used in many companies to understand the profitability of its products or services. In many definitions, you'll see that it's about the profitability of activities, and such activities are most of the time selling products. Because that's what companies do. Many times, we think about profitability in very simple terms. We buy resources, transform them into products, and sell those products.
And the difference between the revenue received from selling our products and what it costs us to build them is our profitability. Well, yes and no, because that's easy and true for everything that you'll buy to go into a specific product, but there are many costs in a company that are not specific to a product, but still need to be taken into consideration. For example, if you have a machine that participates in the building of your product, it's not a constituting element of your product, but you might not be able to create the product without it.
And so the question arises about how you take that machine into consideration and see the real profitability of your products. Well, cost accounting is here to answer exactly such questions. It's a way to take everything that's ambiguous about the profitability of what you sell and clarify how to build it into your product costs. There's actually many forms of cost accounting because it's not a regulated practice. Unlike a regular accounting, which is very regulated and needs to comply to generally accepted accounting principles, cost accounting is an internal process which exists only to benefit the management team to better drive its business.
So each company has a different way of doing cost accounting, and so should you so it's as clear as possible to you and the people you'll be sharing your insights with. In many companies, cost accounting is done solely on costs associated with production. In this course, we'll go beyond that and include all the costs of your company. The reason is that when limited to production, what you see as a profitability result is not really the profitability that needs to be generated.
For example, if all your products were break-even, meaning not losing money but not generating profits either, your company would still be losing a lot of money. Why? Because you still need to pay for rent and salaries for support employees, such as accountants, marketing, sales, and the costs associated with running the company that fall outside the realm of production. In the real world, you can't afford to be profitable on paper. So in this course, we'll be using the cost accounting technique for all the company costs, so that when you say your products are profitable, then your company is profitable too.
We'll start from scratch and review where to find the data to start the process. We'll discuss as well how to use that data to create a baseline for profitability by product and how to turn that into a tool we'll use to build a robust plan. The objective of this course and of cost accounting is to create clarity about the products you're selling and how profitable they are. This way, you can use that knowledge to make more informed business decisions.
- How profitability works
- Determining your baseline
- Deciding on a time frame
- Gathering revenue and cost information for your analysis
- Connecting targets with profitability
- Building your target baseline
- Analyzing your pricing
- Calculating probable product profitability