The importance of cost accounting and its applications on the best cost accounting software

Published By Omar Safwat
Date of publication 2020 February 09


أهمية محاسبة التكاليف وتطبيقاتها فى أفضل برنامج محاسبة تكاليف

The companies always seek continuity and presence in the business market, as the business market is characterized by intense competition and a permanent increase in the numbers of companies, companies had to build a strong system of costs commensurate with the nature of the company's activity and provide accurate information of product costs that enable them to tighten control over the cost elements and then excluding avoidable costs and reducing the costs of products as much as possible while achieving the desires of the customer to increase product sales and then profits maximization, finally, continuity and increase competitiveness in the business market, and to achieve this daunting equation, it is just companies must first apply modern cost systems such as activity-based costing (ABC), as well as follow modern methods of reducing costs such as the continuous improvement method, target costing, and total quality management, etc. however, with the diversification of activities and the large size of companies, the application of such modern systems for cost accounting has become difficult and can only be achieved with the use of cost accounting software that achieves the company's objectives by linking all departments and providing all the accurate data of the company's cost elements in a way that ensures companies control the cost elements and then conduct control over them, in this post we will cover how this can be achieved but first we must get to know the importance and objectives of cost accounting

The importance of cost accounting

Cost accounting is important for all activities (companies) and it is not as is prevalent that cost accounting is limited in importance for manufacturing companies only, cost accounting has a significant role in determining and controlling the services cost, and that the success factors of any commercial activity is the use of cost accounting systems and therefore the importance of cost accounting is as follows:

1- Cost control by collecting and recording all the cost elements of the company.

2- Cost classification through cost accounting methods, which enables us to differentiate between all types of costs.

3- Pricing of products in cost accounting plays a significant role in controlling the pricing of products, as it provides cost reports, it is also possible to take advantage of modern methods of pricing of products such as the target costing method, through which the price of products can be determined and the target profit margin added before starting production.

4- Contributing to increasing the company's profits and increasing its competitiveness, had it not been for the presence of cost accounting, the companies would not have been able to know the costs of products and control these costs, and thus the ability to reduce costs to the lowest possible extent and increase profits to the maximum possible profit.

5- Creating the budgeting, through the methods of cost accounting, the company can create budgeting, and so that such budgeting can be created, the actual activity costs of the company must be examined for previous years so that the company can forecast what the future cost will be and can also be through budgeting of tightening control and control of cost elements by comparing actual costs with standard costs and detecting variances, then analyzing these variances and working on resolve shortcomings of costs.

6- Assisting the department in making decisions by providing the essential cost reports, whether it is for the production elements or activities (cost centers) to assist the department in excluding the avoidable costs, and supporting the important cost centers that achieve the customer’s desires and increase the product’s ability to compete in the market.

Cost accounting has a set of objectives that are seeking to achieve in companies so that companies achieve their desired objectives

The objectives of cost accounting

The objectives of cost accounting are fully consistent with the company’s objectives, as they both seek to cost reduction and increasing the profitability and competitiveness of the company, perhaps the most important of these are the following:

1- Accurately determining product costs, through what cost accounting does of collecting, recording and classifying costs.

2- Controlling over cost elements.

3- Assisting the department in making decisions through adequate cost reporting.

4- Planning for the future through cost accounting that provides the budgeting.

5- Pricing products and determining the target costing and then profits maximization.

6- Increasing the profitability and competitiveness of companies.

The following will cover the most important applications of cost accounting for some activities

Cost Accounting Applications

There is no activity without its ability to apply cost accounting to it because all activities can be applied to cost accounting

We will cover some of the activities to which cost accounting is applied, such as

1- Hotel cost accounting

Cost accounting in hotels performs to record all the hotel costs, classify and analyze them to provide reports to the department for monitoring and decision-making purposes, in the hotel system; it follows the uniform system of accounts, each hotel department has its revenues and expenses and hence all departments of the hotel can be considered as cost centers and cost accounting procedures in hotels based on designing a chart of cost centers, which consists of

A- Revenue cost centers that generate revenue

It refers to the hotel divisions that revenue-generating for the hotel and are its activity base such as

1- Rooms Division

2- Food Department

3- Beverage Department

4- SPA& Fitness Division

5- Laundry Department 

6- Front Office Department

B- Service cost centers that do not generate revenue

1- Finance Department

2- Human Resources Department

3- Procurement Department

The role of cost accounting in hotels

Dividing the hotel into cost centers where the costs is calculated, whether they are fixed costs or variable costs, direct costs or indirect costs, and each cost center is allocated by its proportion of the costs, hence the role of cost accounting appears in measuring the ratios of fixed costs from activities that do not generate revenue for the hotel to the total costs to work on reducing it to the maximum possible extent that does not affect the operational capacity of the hotel, in addition to the role of cost accounting in measuring revenue from activity to know how much each department (cost center) generates revenue and how much is spent on it of the expense and in the end it is possible to create Cost Center reports for each department (cost center) separately and also for the hotel in general and through these reports the hotel managers can exclude activities that do not generate revenue or address the shortcomings and analyze the causes of their problems as well as expand activities that generate revenue for the hotel.

2- Manufacturing Cost Accounting

The manufacturing activity is characterized by that is based on the process costing system; for example a manufacturing plant (packaged cheese), there are certain stages for the production of a single package (the product), so it is possible to calculate how much it costs from direct materials, direct labor and manufacturing overhead cost, and therefore it is easy to forecast the costs of each work order in advance, even if approximately, and creating production budgets and comparing these planned costs with the actual costs, and cost accounting determines the cost elements for each work order through

A- Direct Materials Cost

It means all the materials used in the production process, whether raw materials, semi-finished materials, or packing and packaging materials, etc. cost accountant monitors their prices by following the policy of perpetual inventory through controlling the inventory, which enables him to determine direct material costs.

B- Direct Labor Cost

It means all direct labor costs incurred production as wages for machine operators (picking, packaging, sorting, production line workers, etc.).

C- Manufacturing Overhead Cost‬

The cost accountant calculates all overhead costs and additional services and allocating them to the products in proportion to the consumption of each product of them and that is by creating cost centers for all production departments and allocating each department with the necessary overhead costs.

The role of cost accounting in manufacturing 

Cost accounting has a significant role in the manufacturing activity, as it calculates the product costs accurately, which assists the company in setting product pricing policies, it also has a major role in tightening control over cost elements of direct material costs, direct labor cost and manufacturing overhead cost through controlling materials costs as well, the company can know the ratio of fixed costs to total costs in a way that assists the department to reduce the fixed costs to the lowest possible degree, which does not disadvantage the company's activity, as well as, cost accounting plays a significant role in the treatment of the cost variances through the provided budgeting, so each work order, it must be included in the budgeting to compare the actual costs with the standard costs and knowledge of variances and analyzing them and then treatment of these variances.

The importance of cost accounting software

Cost accounting software has a significant role in applying the policies and procedures of modern systems of cost accounting and calculating costs as accurately as possible, through

1- Linking between the departments in the cost accounting software of the manufacturing companies assists in classifying, recording and appropriate allocation of all the costs to each cost center immediately which no leaves the field for neglecting any cost.

2- Linking between the purchasing department and finance department of manufacturing companies enables the cost accountant to calculate and control material costs as accurately as possible and evaluate the prices of materials in a way that increases the ease of pricing products.

3-Linking between the production department and the human resources department facilitates the calculation of wages and then the cost of the product.

4- Creating a chart of cost centers and linked it to the chart of accounts, that achieves modern systems of cost accounting.

5- Reports provided by cost accounting software facilitate the works of cost control as well as of creating budgeting and of detecting variances as quickly and accurately as possible, thus analyzing their causes and treating them.

6- Cost accounting software facilitates the decision-making by eliminating avoidable costs.

After we have covered the most important advantages of enterprise cost accounting software, we will present a leading example of the best manufacturing cost accounting software

AccFlex ERP Production Planning Software

Production planning module of AccFlex ERP is considered a model of what should it be the manufacturing cost software; it is suitable for all manufacturing activities due to its flexibility, the software is capable of receiving a chart of accounts and cost centers for any manufacturing activity.

AccFlex ERP production planning software has many features including:

1- Linking the warehouse to all departments of the company

One of the most important success factors of the production planning software is the linking of the company's departments, especially the purchasing department (inventory items) as the materials used in production and the rest of the company departments, as it allows all departments of the company to know the stock balances of materials as well as to assist the finance department of the inventory control process to know the costs of each production order, as well as allows to the production department of easy planning of work orders and supply the purchasing department with its requirements of materials over the next period.

2- The accuracy of calculating direct materials cost

One of the most important advantages of production planning module of AccFlex ERP is the existence of inventory valuation policies whether (first-in, first-out (FIFO) - last-in, first-out (LIFO) - weighted average) which assist the cost accountant to estimate and calculate the direct material costs in manufacturing activity as accurately as possible, in addition to the software performs comparing between cost price and selling price to see the amount of profit/loss.

3- Linking between costs and item group

One of the most important features of production planning module of AccFlex ERP having a screen through which can create a group for a particular item and determine the cost price for this group and link it to the production department, there are some areas of manufacturing that have an item kit linked to item group and does not issue as a single, so production planning module of AccFlex ERP has provided a solution to this problem.

4-The remarkable customization of AccFlex Production planning software screens

Production planning module of AccFlex ERP is characterized by simplicity and ease in customizing screens for all manufacturing activities in a simplified and accurate way that is easy to work on it and it is impossible to occur mistakes by configuring a screen for each function in the manufacturing area.

5- The ability to organize the production process automatically

Production planning module of AccFlex ERP has a screen for production processes through which can link the finished product and inventory items and determine what needs the production of one unit of the finished product of raw materials and additional expenses automatically so that the software calculates production costs without human intervention.

6- Creating production orders automatically

Production planning module of AccFlex ERP is characterized by the presence of a screen through which a production order can be created and production planning module of AccFlex ERP automatically deducts items from the raw materials warehouse and know their costs as well as add them at ‎selling prices to the finished product warehouse and this is one of the most important strengths of production planning module of AccFlex ERP, which characterizes it from other software.

7- Automatic debugging and AI systems for the software

Production planning module of AccFlex ERP that always debugging of input automatically and does not accept closing general journal entries unless the journal entry sides (debit/credit) are equal as well as does not withdraw larger quantities of quantities in the warehouses in addition to the presence of screens for artificial intelligence such as the Manufacturing Processes Control screen, which is one of the most important strengths of the software of production planning module of AccFlex ERP.

8- Cost Variance Analysis Report

Production planning module of AccFlex ERP provides a set of powerful reports essential for manufacturing activity through which it can tighten control of manufacturing costs and correct variances and treatment of variances, the purpose of the budgeting is primarily to control the costs by comparing actual costs with standard costs and determine variances, whether negative or positive to analyze the causes of variances and treatment them, and through production planning module of AccFlex ERP can create budgeting and review cost variance analysis report and achieve the objectives of the budgeting, in addition to many reports of all manufacturing costs that assist the department in the works of oversight, planning, and decision-making.

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