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Demystifying Cost Accounting: Beyond the Numbers – Part 3
February 20, 2024

By Christopher Thomas, Founder of "Blue Oak Consulting"

FP&A Tags
Cost Planning
Planning and Budgeting
Profitability Analysis

In the final part of the “Demystifying Cost Accounting: Beyond the Numbers” series, we present a practical action plan for implementing cost accounting in scenarios with limited time and resources. This guide is particularly beneficial for CFOs seeking to introduce cost accounting methods strategically, efficiently, and scalably. Implementing cost accounting efficiently and with limited resources requires a strategic and streamlined approach. Here’s a step-by-step action plan to achieve this.


Step 1: Define Clear Objectives

  • Identify specific goals: Understand what you want to achieve with cost accounting – better pricing strategies, improved profitability, or more effective budgeting.
  • Prioritise objectives: Focus on key areas where cost accounting can have the most immediate impact. For instance, cost accounting can be needed for budgeting and forecasting.


Step 2: Simplify the Costing Process

  • Start with a basic costing model: Choose a simple yet effective costing method that suits your business model.
  • Avoid over-complication: Initially, avoid intricate details that can be added later as the system matures. Consider the following example: the business produces five products on one piece of equipment, so raw materials would be directly cost to a product. However, equipment costs, such as depreciation, labour and utilities, would also be allocated.


Step 3: Leverage Existing Resources

  • Utilise existing financial data: Start with the data you already have in your accounting software.
  • Train existing staff: Instead of hiring new employees, train current staff on the basics of cost accounting. You can do so by reviewing actuals from prior periods (months, quarters, or even years).


Step 4: Implement Cost Accounting Software

  • Choose affordable software: Opt for a cost-effective, user-friendly accounting software that can handle basic cost accounting needs.
  • Ensure software scalability: The software should help you scale up as your business grows. Implementing an Enterprise Resource Planning (ERP) system can be a good solution, as it allows for cost accounting.


Step 5: Focus on Key Cost Areas

  • Identify major cost drivers: Concentrate on the main costs impacting your business, such as raw materials or labour.
  • Implement cost tracking: To understand their impact on your products or services, begin tracking these costs meticulously. You will have to spend more time on the “big ticket” items driving costs and allocate fewer expenses if needed.


Step 6: Develop a Simple Budget

  • Create a basic budget: Use your cost findings to formulate a simple budget that can guide spending and pricing decisions.
  • Review and adjust this budget regularly: Review it regularly and adjust the budget as you gather more cost data. That means you will be able to consider costing updates as you identify increasing variances.


Step 7: Train and Communicate

  • Train key personnel: Ensure that staff involved in cost accounting understand its importance and basic principles.
  • Communicate the changes to all stakeholders: Inform them about the new cost accounting measures and how they will impact the business. Communication and alignment are the keys to success. As a Finance professional, ensure that Operations and Engineers are included in the discussions.


Step 8: Monitor and Review

  • Regularly review cost data: Analyse cost information regularly to identify trends, anomalies, or areas for improvement.
  • Adjust the system as needed: Be prepared to change the costing model as you learn more about your costs and your business evolves.


Step 9: Scale Gradually

  • Expand the system over time: As you become more comfortable with cost accounting, gradually introduce more complex elements like activity-based or standard costing.
  • Align with business growth: Ensure that the sophistication of your cost accounting system grows in line with your business.


Step 10: Seek Professional Advice (If Needed)

  • Consult with a professional: If you’re unsure about implementing cost accounting, consider getting advice from a financial consultant or an experienced accountant.


Conclusion

This action plan is designed to help you implement cost accounting tailored to your business’s immediate needs and resources effectively and manageably. Remember, the key is to start simple, focus on the most impactful areas, and gradually build up the system as your resources and understanding grow.

We hope these insights and strategies empower CFOs to harness cost accounting as a strategic tool for business success.

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