You can only invoice your internal and external customers if you know the costs of individual processes and services. With process cost accounting, you determine the charges for sub-processes in overhead expenses, determine transfer prices, and identify the potential for improvement.
Activity-based Costing Makes Overhead Costs Transparent
Process cost accounting is a method of controlling costs to get more transparency. The focus is on overhead or indirect costs. Companies have the peculiarity of regularly increasing over the years. They are usually distributed to products or services, the cost objects, with flat-rate surcharge rates. Distribution makes products and services too expensive and others too cheap.
Classic cost and performance accounting are no longer sufficient for a differentiated pricing policy on the market.
Activity-Based Costing
Process cost accounting determines and analyzes processes and associated costs (process costs) in the indirect company areas. Activity-based costing should enable the causal allocation of all charges to products, services, orders, or customers.
Goals of Process Cost Accounting
The main goals to be achieved with the use of process cost accounting are:
- The costs of a process, a service, or a product cause should be determined as precisely as possible.
- The total cost of a company or division must be appropriately attributed and offset against the processes, services, or products that cause it.
- Cost structures and cost drivers should become more transparent.
- Potential should be visible where you can improve performance or save costs.
- It would help if you pursued a strategic pricing policy on the market.
- It would help if you sharpened the cost awareness among the employees.
These goals show that process cost accounting can provide beneficial results for both strategic and operational control.
Screen Processes and Identify Cost Drivers
In process cost accounting, the company will view a value chain in which processes create direct value for the customer and, thus, for the company; these are the value-adding processes. Other methods indirectly generate this value, as they are auxiliary processes for those who add value. These aid processes take place in the so-called indirect areas. Research and development, HR departments, information services, or management are examples.
To identify the reasons for inflated costs in such areas, you should take three steps:
Step 1: Narrow down the search area for cost drivers.
Those using process cost accounting want more transparency in these indirect company areas. First, you need to analyze the processes, procedures, and activities. The central initial question is: “What does it cost us?” Methods whose costs are unknown can be, for example:
- Planning and execution of orders
- Processing customer complaints
- Vacancies and selection of applicants
- Conducting training
- Participation in a fair
Step 2: identify cost drivers.
In the second step, the cost drivers are determined. These are the factors that determine how expensive such a process will be. It depends on the amount of power. Example: In the area of personnel development with the implementation of training courses and seminars, the number of workshops or seminar participants can be the number of services and thus cost drivers. Criteria for defining cost drivers are:
- The cost drivers must be measurable, predictable, and, therefore, calculable.
- There must be a correlation with process costs; the total costs (all cost types) in this process are directly dependent on the number or quantity of the cost drivers.
- The effort to measure and record the cost drivers must be reasonable.
- The employees should recognize from the cost drivers that they significantly impact the total costs, which sharpens their cost awareness.
Step 3: Allocate the process costs to the cost drivers.
In the third step, the total process costs are fixated on the cost driver. The allocation results in the process cost rate that you can use to plan and optimize processes and billing.
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