A business's profitability is largely determined by the costs incurred in manufacturing a product and the price at which it’s sold. Cost accounting is how businesses calculate these two factors with precision.

This article will tell you what cost accounting is and what it means for businesses in Germany, especially during periods of economic volatility. We’ll also explain how cost accounting helps you with controlling, and give you a step-by-step example of how the process works.

What's in this article?

• Cost accounting: What is it and why is it important?
  
• The importance of cost accounting during periods of economic volatility
  
• How cost accounting helps with controlling
  
• How does cost accounting work?
  
• An example of cost accounting
  

Cost accounting: What is it and why is it important?

Cost accounting, sometimes also known simply as costing, is a financial management process. Businesses in Germany use it to systematically record, plan, and control their costs. The goal of cost accounting is to produce a clear overview of the cost structure so you can make informed operational decisions.

In cost accounting, a business captures all cost types directly associated with the internal production of its goods or services. It then determines where each of these costs was incurred, and compares these figures with its revenues. Cost accounting is therefore an important part of running any business and is used to help manage and control the company.

Costing offers only a rough overview of a business’s financial situation. It does not look at as many factors as financial accounting. For example, it does not consider external processes like proceeds from share trading.

The importance of cost accounting during periods of economic volatility

Costing plays a greater role in managing businesses in Germany during periods of economic uncertainty and rising costs. Since mid-2021, in particular, a number of different factors have resulted in significant price hikes. First, supply bottlenecks related to high overall demand during the pandemic produced noticeable price increases. This situation was further exacerbated by the start of the war in Ukraine in 2022, which caused food and energy prices, in particular, to skyrocket.

These price increases peaked in 2022, with consumer prices up 8.7% year-over-year, and producer prices for commercial products rising by a whopping 29.8%. This was followed by an increase in wage growth, reaching 6.4% in 2023, the highest level since the 1990s, putting a further strain on businesses.

Starting in 2024, things began to cool off: Consumer prices rose by just 2.5% year-over-year, while producer prices for commercial products actually fell 1.8%. Gross wages and salaries, on the other hand, continued to climb, rising 5.3% in 2024.

In a climate like this, cost accounting remains an indispensable management tool. It enables businesses in Germany to closely monitor trends in both fixed and variable costs, and to take targeted action in response to changes. Even during periods of moderate inflation, businesses have to review and adjust their spending on a regular basis if they are to stay competitive.

How cost accounting helps with controlling

Internal accounting, or controlling, is the process by which businesses in Germany systematically record, monitor, and manage their financial and operational processes. A key part of controlling is cost accounting, which serves multiple functions:

• Capturing all costs and spending
  
• Calculating and providing a valuation of individual cost units
  
• Assessing the financial health of the business, such as by comparing planned costs with what was actually incurred (target versus actual comparison)
  
• Optimizing profitability by identifying potential for adjusting prices, cutting costs, and boosting efficiency
  
• Establishing a flexible and sustainable cost structure
  
• Preparing relevant data for strategic decisions
  

How does cost accounting work?

Cost accounting follows a structured process that differentiates between cost types, cost centers, and cost units.

Cost type accounting

Cost type accounting is a way of systematically recording all costs incurred. It answers the question: what costs have been incurred and how much were they? These costs are broken down according to various criteria. For example, you might differentiate between fixed and variable costs: Variable costs depend on the production volume, while fixed costs are incurred regardless of volume. Another way of categorizing costs is to separate them into primary and secondary costs: primary costs are incurred through external services, while secondary costs come from the consumption of internal resources. It’s also particularly important to differentiate between direct costs and overhead costs when calculating cost types:

• Direct costs: These can be attributed directly to a specific product or service (e.g., the cost for screws required to manufacture a table).
  
• Overhead costs: Unlike direct costs, overhead costs are incurred for multiple products simultaneously, and cannot be attributed to a single product (e.g., the cost of leasing a production facility, which a business would allocate as an indirect cost for individual products or services).
  

Stripe can help businesses in Germany with their cost accounting by capturing earnings and spending with precision. With Stripe Invoicing, you can do more than just generate and send invoices for one-off payments—you can also track them. Similarly, Stripe Billing helps you manage recurring, usage-based, and contract-based billing—allowing you to monitor your earnings and spending in real time and improve the accuracy of your cost accounting.

Cost center accounting

To correctly allocate overhead costs, the next step is cost center accounting. In this step, costs are spread across the different departments or areas of a business that incurred them. For example, the costs of leasing a production facility can be split across the individual production departments according to how much floorspace each department used.

Cost unit accounting

Finally, all the direct costs and overhead costs that have been calculated are assigned to their respective cost unit. Cost units are the products or services that the costs were ultimately incurred for.

By adding up all costs incurred per product, the unit costs for each individual product can be calculated. A business can then compare these to the revenue generated from a product to determine how profitable it is. Cost accounting is therefore used in the controlling process to assess the economic efficiency of each individual product.

An example of cost accounting

Below, you’ll find a hypothetical example of cost accounting for the manufacture of wooden tables at a small carpentry workshop. It’s assumed that the workshop produces 100 tables per month, and that each table sells for €450. The first step in cost accounting is to capture the relevant cost types and assess how they should be allocated:

Direct costs:

• Material costs for lumber: €200 per table
  
• Production wages: €100 per table
  

Overhead costs:

• Costs for leasing production facility: €1,000 per month
  
• Electricity for running machines: €200 per month
  
• Admin costs (e.g., for offices or communications): €500 per month
  

Calculating direct costs

Direct costs can be allocated to a specific product. A table incurs the following direct costs:

Splitting overhead costs

Overhead costs are split across multiple products. The first step is to calculate the total overhead costs:

Since the carpentry shop produces 100 tables per month, the overhead costs are split across those 100 tables. In order to calculate the overhead cost per table, the total overhead cost is divided by the number of tables produced.

Overhead Cost / No. of Tables Produced = Overhead Cost per Table
€1,700 / 100 = €17

Calculating unit costs

Now, the direct costs and the appropriate percentage of overhead costs per table are added together:

Profitability analysis

Once the unit costs have been calculated, they can be compared to the sales revenue.

In this example of cost accounting, the carpentry shop achieves a gross profit of €133 per table sold.