Two services can generate the same revenue while leaving very different results. One takes little time; the other ties up the team, requires purchases and involves numerous revisions. Financial accounts do not always make that difference visible.
Cost accounting connects costs to the activities, products or projects that use the resources. Here is how to start with simple rules and interpret the results without jumping to conclusions.
At a glance
- Cost accounting allocates costs and income to analyse activities in more detail than the financial accounts.
- It helps calculate product and service costs, review prices and compare activities.
- Direct costs are assigned to the relevant cost object; indirect costs are allocated using documented allocation bases.
- Start with a practical question. A simple model that is kept up to date is often more useful than an excessively detailed system.
What is cost accounting?
Financial accounting records transactions and produces the company’s accounts. Cost accounting uses those data to answer management questions: how much does an assignment cost? Which product contributes most to the result? Is a maintenance service priced appropriately?
It is not a second set of tax accounts. It is an internal tool whose level of detail depends on your needs. It does not replace statutory bookkeeping obligations.
Consider a fictional chocolate maker. Its accounts show total purchases, salaries and rent. Product analysis allocates cocoa, packaging, production time and a share of workshop overheads to the different chocolate bars. Their margins can then be compared.
Choose a question before creating categories
Cost accounting quickly becomes cumbersome if you try to measure everything. Start with a decision: which assignments are profitable, which outlet covers its costs or which product range uses the most resources? That question determines the information you need to collect.
For an agency, tracking time by project may be more useful than subdividing office supplies into many categories. For a workshop, machine hours, setup time and material losses may be more revealing. The right level of detail helps explain an economic difference.
Agree recording rules with the people involved. If one person assigns an hour of preparation to a project while another treats it as overhead, comparisons become unreliable. A few simple, consistent rules produce better information.
Which decisions can it improve?
The first use is calculating product and service costs. But the value goes beyond setting prices. You can also decide to change a recipe, review a process, negotiate purchasing terms or stop offering a service that consumes too many resources.
A watchmaker preparing a new range can estimate components, labour hours and launch costs before committing. An agency may discover that a popular service requires many unbilled revisions.
Be careful: an activity that appears loss-making after all fixed costs have been allocated may still make a positive contribution towards those costs. Before dropping it, identify which costs would actually disappear. Accounting allocations are not all potential savings.
Five steps to get started
1. Define the question and cost objects
Choose what you want to analyse: products, projects, customers or departments. An agency might start with design, copywriting and strategy teams. A cost centre tracks expenses; a profit centre also tracks the income attributable to it.
2. Collect useful data
Gather invoices, personnel costs, time records, volumes and production information. Check consistency with the financial accounts. Poor time tracking can distort the analysis more than unsophisticated software.
3. Assign direct costs
Material used for a product or work devoted exclusively to a project can be assigned directly. Document the rules so that two employees classify expenditure in the same way.
4. Allocate indirect costs
Rent and administration often benefit several activities. An allocation basis should reflect their resource consumption as closely as possible: floor area, machine hours, working time or number of orders.
The basis chosen affects the result. You must therefore be able to explain it and review it when the organisation changes.
5. Compare, decide and check
Compare planned and actual costs. Investigate differences caused by volume, productivity, higher purchase prices or additional services. Choose an action, then check its effect on the margin.
Start from consistent accounts. A suitable Swiss chart of accounts and a clear treatment of business expenses make the underlying figures easier to trace.
Which method should you choose?
| Method | Purpose | Limitation to understand |
|---|---|---|
| Full costing | Allocate all costs within the chosen scope | Results depend on the allocation bases |
| Variable costing | Measure the contribution towards fixed costs | The resulting contribution margin is not final profit |
| Activity-based costing (ABC) | Link costs to the activities consuming resources | Collecting cost-driver data takes work |
Direct/indirect and fixed/variable are two different classifications. The fixed salary of an employee dedicated to a project may be a direct cost. A variable cost shared by several products may be indirect.
Compare two offerings before deciding
The following fictional annual figures use the same scope and exclude recoverable VAT. Amounts are in CHF.
| Item | Offering A | Offering B | Total |
|---|---|---|---|
| Sales | 60,000 | 100,000 | 160,000 |
| Variable costs | −20,000 | −40,000 | −60,000 |
| Contribution towards fixed costs | 40,000 | 60,000 | 100,000 |
| Allocated fixed costs | −45,000 | −35,000 | −80,000 |
| Full-cost result | −5,000 | 25,000 | 20,000 |
Should offering A be discontinued?
Not solely because of its full-cost loss. Suppose discontinuing A would save no fixed costs and release no capacity that could be used for another sale. The result would become CHF 60,000 − 80,000 = −20,000.
The business would lose A’s CHF 40,000 contribution. The decision must therefore consider genuinely avoidable costs, released capacity and alternative sales, not just the allocation basis. If some fixed costs disappear or a more profitable offering replaces A, recalculate the result.
Understand the effect of an allocation basis
Two activities share CHF 12,000 of administrative costs. They generate equal revenue, but activity A produces 80 cases and activity B only 20. Allocating by sales would assign CHF 6,000 to each. Allocating by the number of cases would assign CHF 9,600 to A and CHF 2,400 to B.
No allocation basis is correct simply because of its name. If administrative work mainly depends on the number of cases and their complexity is comparable, the second approach may better represent resource use. If B’s cases take much longer, the analysis needs refinement.
Explain your chosen basis and reassess its relevance when the organisation changes. Do not change the method merely to make an activity look more profitable on paper.
When capacity is limited, consider contribution per bottleneck hour
If the team has spare time, an order that covers its additional costs can contribute towards fixed costs. When orders exceed capacity, however, you also need to consider the scarce resource.
Service A provides CHF 600 of contribution after variable costs and uses ten hours of the resource limiting production. Service B provides CHF 450 and uses five hours. A contributes more per order; B contributes more per hour: CHF 90 rather than CHF 60. With ten hours available and sufficient demand, two B assignments provide CHF 900 of contribution, compared with CHF 600 for one A assignment.
This calculation assumes the orders are interchangeable, the margins cover the same scope and no other constraint applies. It does not, by itself, determine a customer’s strategic value or override commitments already made. It does show why the largest invoice does not always make the best use of limited capacity.
Keep the system useful
Start with one important activity, then expand. Use a spreadsheet or suitable software, appoint someone responsible and schedule regular updates. Share the findings with the teams able to act on them.
Cost accounting complements budgeting and the monitoring of avoidable costs. Its purpose is to prepare decisions, not generate extra tables that lead nowhere.
Start with analysis your team can use
Choose a few activities, understandable rules and a realistic review schedule. You can add detail once the initial information has already improved a pricing, organisational or capacity decision.
To start with consistent accounts and structure the data useful to your business, speak with our accounting team.
Frequently asked questions
Is cost accounting useful for a small business?
Yes, if it needs to know the cost of a service or compare several activities. The model can remain very simple.
Do you need specialised software?
Not necessarily. A spreadsheet may be enough at first, provided the data are reliable and the rules consistent.
Does a negative allocated margin mean a product should be discontinued?
No. Examine genuinely avoidable costs, capacity constraints and the product’s role in the overall offering.
Sources and references
Romain Prieur is a Swiss certified public accountant and the founder of Entreprendre.ch. With more than ten years of experience in auditing and supporting businesses in Switzerland, he advises entrepreneurs on company formation, accounting and taxation.
