What is cost accounting?
Cost accounting is a technique that analyses the income and the costs in accordance with the activities or products that the company produces or sells. It consists in assigning the indirect and direct costs to each tracking category, allowing to know with better precision where the cost or income is generated.
Why is it important to implement cost accounting in a company?
1-Allow to know in detail the costs and income for each activity/product of your company detecting inefficient areas.
2-Help with the profitability analysis.
3-Help in making decisions to reduce costs and improve results. Also, provides important information to make strategic decisions.
4-Helps to put sales prices based on the real costs.
5-Allows you to obtain a P&L for each tracking category.
In the end, it gives you information very valuable to maximise the profitability of your business.
How do you set up a tracking category?
1-Determine the activities or products that your company offers.
2-Establish assignment cost criteria to each tracking category.
3-Design a system to record the costs and income per tracking category.
4-Assign the direct costs directly to each tracking category.
5-Apportion the indirect costs (rent, services..) between the tracking categories that are using these resources.
6-Obtain periodic reports for each tracking category to analyse fluctuations and results.
7-Make decisions to reduce costs and improve profitability.
Difference between cost accounting and financial accounting.
The cost accounting allows you to obtain information about the profitability of each activity or product that your company offers. You can analyse the costs of the products, departments or activities.
Financial accounting provides financial information about the company as a whole. Provides how it is the financial situation of the company based on the balance sheet, P&L, cash flow statement and statement of changes in equity.
How to use Xero using tracking categories?
- Login in to your Xero account.
- From the Accounting menu, select tracking categories.
- Click Add Tracking Category.
- Enter Tracking category name
- Click Save.
You can add tracking categories to bank transactions, invoices, bills, payroll employees and even the depreciation of each asset.
How to run a report for tracking categories in Xero:
- Go to the accounting menu and select Reports.
- Find and open the Tracking Summary report.
- Select the date range.
- Choose an Account Group and the Tracking category.
- Click update.
If you need help with this, or with other advice, then please get in touch with our accounting team.