Analyzing Your Cost Accounting System

Cost accounting is a very important function in development financial models of corporate objects (e.g. brands or products), projects and processes – key components of your financial value maximization system.

Financial value of any object, project or process is determined by free cash flows generated by the object, project or process in question. These cash flows, in turn, are calculated as revenue minus cost (expenses) minus the necessary increase in working capital. All associated with the corresponding object, project or process.

Therefore, accurate allocation of corporate costs to corporate objects and activities (and, therefore, to projects and processes) is an absolute must for financial value measurement, management and maximization.

Cost accounting refers to a methodology for exactly such cost allocation. There are many such methodologies in existence: standard cost accounting: lean accounting, activity-based costing (ABC), resource consumption accounting, throughput accounting, life cycle costing, target costing, environmental accounting, etc.

Your job is to select the one that best fits your company (or its specific area). In terms of accuracy of cost allocation, obviously. And to develop and deploy a highly efficient cost accounting process and the comprehensive cost accounting system (CAS).

To make it happen, you will need to bring on board highly competent CAS manager and personnel (cost accountants). Obviously, they must be armed with optimal and highly efficient cost accounting tools.

And no less obviously, they will need a detailed description of your cost accounting system which must be comprehensive, well-structured, accurate and up-to-date.