Assessment of Costs in Accounting

Assessment of Costs in Accounting

The evaluation of costs determines the identification and amount of the respective cost types. These amounts are included in further calculations of cost and performance accounting. Payments from financial accounting are used to evaluate some cost types, such as personnel costs or external services used by the business. Since these costs can vary, average values or expected costs are usually used.

In the cost and performance calculation, the costs can also be assessed according to the following factors:

• Transfer pricing
• Average prices
• Replacement prices
• Opportunities (for example, capital costs)

Structure and Categorization of Costs

In order to get a systematic cost breakdown in your company, one should observe the following principles:

• Principle of uniformity
  • Cost types should be structured in such a way that different people can assign the same facts at different times.
• Completeness principle
  • All cost types incurred by one’s company must be included in the outline. It is essential to include all expenditures to ensure an accurate evaluation and understanding.
• Principle of uniqueness or freedom of overlap
  • Costs may not be recorded and offset multiple times. They must be assigned to a category without overlap to ensure accuracy.

If one observes these principles, one can characterize cost types differently. The details of each feature one uses to differentiate between categories depends on the questions and purposes of the cost element calculation. In reference to production quantity, the following characterizations and classifications of costs are mainly used for planning and analysis:

• Variable costs
• Fixed costs
• Fixed costs after offsetting on products and services (also referred to as Cost Unit Accounting)
• Relevant indirect costs
• Overhead according to the location in the value chain where the costs are incurred
• Relevant in primary costs
• Secondary costs after division into functional areas
• Relevant in production costs
• Also referred to as Administrative Expenses and Procurement Costs

The meaning of these cost terms and the respective characteristics are explained in great detail online if you would like to understand each one further.

Create a Cost Element Plan

Once the information about cost types is gathered, one can then begin to create a cost-type plan. This list of the cost types includes respective characteristics, possible input variables, measurement methods, and evaluations. Actual costs can then be entered and assigned to the period in which they were incurred. The average costs and the planned costs can then be derived from the actual costs. This will become less confusing and very simple to do with some practice. 

Practice

One can then compile data for their own purposes. For example, the financial or budget planning of a business case. The following questions should be considered for this type of analysis:

• What types of costs can arise?
• How are the consumption of materials and hours measured on which the costs are based?
• Which procedures and calculation methods are used to determine the amount/amounts of the respective costs? For example, surcharges, average values, acquisition costs, payments, etc.?
• Which time periods are considered and differentiated? Year, quarter, month, week, day?

Enter this information in a cost element plan. Pay close attention to the following principles:

• Uniformity
• Completeness
• Uniqueness

Example Personnel Costs

In the first step, the personnel costs can be derived from accounting data, payments for wages and salaries, as well as social insurance (ancillary wage costs). For further calculations, these personnel costs must be considered differently. For this purpose, personnel costs are determined based on time tickets or daily work reports. The non-wage costs are then added to the wage costs using previously calculated surcharge rates.

 

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