Differentiation between primary and secondary costs
Now let’s take a closer look at the sub-area of primary and secondary costs, as this distinction is often particularly relevant in practice. It is important that the costs can be clearly assigned. Primary costs are incurred when external services are obtained , own services are provided or production factors are used, for example purchased raw materials and other materials. This means that costs arise because services are provided (internally) or procured (external) or goods are consumed in some form. Secondary costs, on the other hand, arise when self-produced goods are consumed. This means that own, self-created goods are reused and thus used up. The main difference lies in recognizing which resources have been used and why.
Result table of the cost type calculation
Which results does the cost type calculation ultimately deliver? The central point is in any case the correct allocation of the costs within the different, defined cost types. For example, it is possible to determine the proportion of fixed costs in individual cost centers . Factors that drive up costs can be identified at different points: it may be a specific process or it is a specific cost center. Conversely, it is also possible to break down the individual components of the costs involved per product. For example, you can determine how much material costs or how much energy costsflow into a specific product. What can you use this knowledge for? Imagine you have a product where the price war with competitors is particularly intense. This product has a low margin on its own, so it’s important to keep costs down to stay competitive . You will therefore take a detailed look at the composition of the costs that have gone into this product. If you then find out that the storage costs are comparatively high, you can draw the appropriate conclusions. It is possible that the proportionate storage costs can be reduced if optimizations such as just-in-time production are carried out, the warehouse is simply better arranged or the warehouse management is optimized. The practical areas of application are diverse and the nice thing is that improvements that are made based on cost accounting can always be translated directly into financial results . So you immediately notice the specific effects of the measures taken and can thus increase your return .
Principles of cost type accounting
There are four central principles for cost type accounting that must always be observed when classifying costs, regardless of the type of cost subdivision you are currently interested in. These principles are:
- Principle of freedom overlap uniformity: There must be no overlap creep, would then be found by the cost of different types of costs. In addition, the structure of the cost types, once developed, should be changed as rarely as possible. This ensures that the constant structure of the costs also enables different periods to be compared. In addition, a uniform procedure for classifying the types of costs must be in place throughout the company so that data can be merged appropriately.
- Principle of clarity or cost purity: All types of costs must be clear. There must be no doubt that could lead to a mixture of different types of costs. Only if this is the case can all costs be clearly assigned. In addition, this avoids that different people, perhaps due to different views, subject costs to different categories.
- Principle of completeness: cost type accounting and generally cost accounting only makes sense if it is complete. All costs must be recorded, because otherwise there is no holistic picture and in the worst case, wrong conclusions are drawn and decisions are made based on incomplete data.
- Principle of profitability: Always ask yourself what extent of calculation makes economic sense. The cost-benefit ratio must always be given. So it is important to find the mediocrity: exact calculations are important, but going into details that do not fit the size of your company can also have a negative effect. So always have your costs under control, but don’t overdo it either.
All principles generally apply to any company that does cost accounting. In itself, this should always be done, but precisely the fourth principle also draws attention to the fact that the level of detail in the cost accounting must be decided individually. It is important to always keep a sense of proportion when you plan to implement cost accounting in your company.
Cost type accounting – example
The best way to explain cost type accounting is with a simple example. Let’s imagine you start a small business that produces handbags. You have different costs, for example:
- Material costs for raw materials that you have to buy
- Various small items for further processing
- A small production hall that also houses two offices
- Four production employees, a sales manager and you take care of the general administration of the company
- In addition, there are other imputed costs, namely the depreciation for the machines used and reserves that you have to set up for business risks
- We shouldn’t forget the additional costs of rent, such as electricity for your machines
So, first of all, you break down all costs depending on the type of cost. This means that you determine, for example, which material costs are incurred for bag A and which for bag B, where you need less fabric. You proceed in the same way with all costs. Some costs can not be clearly allocated , such as energy costs. These costs are overheads. This also includes room rental, for example. The imputed depreciation can be clearly assigned because you create the pockets with different machines. It is therefore clear which depreciation can be allocated to which product group. Imputed risks, however, they cannot be passed on, so they also go into overheads. You have already set up a complete breakdown of the costs according to different types. This structure is the basis for further cost accounting methods. The next logical step would be cost center accounting , in which you then answer the question of where the costs were exactly incurred. Individual costs can be transferred directly to cost unit accounting, as these can ultimately be clearly assigned. The overhead costs, on the other hand, are then subsequently calculated in the course of cost center accounting using so-called “overhead surcharge rates”further distributed. So you can see that the cost type calculation is basically quite easy to carry out. It is important to clearly delimit the types of costs so that there is no confusion later and to distinguish which costs are directly attributable individual costs and which costs are overhead costs .
Cost accounting is generally a topic that should be operated as holistically as possible. How much you go into detail is up to you, but if you want to have your costs under control, if you want to base strategic decisions, e.g. regarding your product range, on financial facts, then you need holistic, structured cost accounting.
The cost type accounting is an important part of this. To a certain extent, it forms the basis for further calculations and at the beginning divides the large bundle of costs into individual sub-areas. It is important that this classification of the various costs is always based on the four principles described. This ensures that everyone involved in cost accounting knows exactly which costs are to be allocated how and where the boundaries of the different types of costs are.
The division into fixed and variable costs also seems to be particularly important . All companies should always have this simple overview, regardless of whether they otherwise operate in- depth cost accounting or not. This differentiation makes it clear which costs would be unavoidable in the event of fluctuations and which will continue to exist. For example, a financial worst-case scenario can be calculated.
Based on the cost type calculation, further calculations can generally be made and initial findings can already be made.