Industrial accounting plays a vital role in business management since it enables the determination of production costs, a key factor in guiding strategic business decisions. Given the importance that this analysis has within business margins, it is necessary to make use of processes and tools capable of providing reliable data and reports that can guide management decisions.
There are several software programs on the market that allow for optimal management of industrial accounting, however, choosing the best solution may not be as easy as one might think. So let’s take a look at what industrial accounting is used for and what are the benefits of its optimal management.
What is industrial accounting
Before delving into an analysis of the advantages of proper management of industrial accounting, it is necessary to dwell on the elements to be taken into consideration. As is now well known, industrial accounting has the task of evaluating what are the costs of production of a given good or work order through data on the activities carried out in individual departments and the corresponding material consumption.
Thanks to industrial accounting, side by side with analytical accounting, it will be possible to get a complete picture of the company’s status and it will also be possible to examine and reshape future business development actions with the intention of achieving the set goals and maximizing results.
Cost accounting and industrial accounting: the differences
Very often the terms “industrial accounting” and “cost accounting” are used synonymously, however, this is incorrect, since they are two processes that partly overlap but do not completely coincide. In fact, industrial accounting, as anticipated earlier, takes into account data related to production processes. Then, by integrating balance sheet data with production data, production costs can be determined.
Analytical accounting, on the other hand, focuses on indirect costs which do not relate to a specific product or service finding a way to identify and allocate them in the most correct way, very often making use of aggregation by cost centers, one of the most widely used methodologies in this type of accounting. Although these two processes refer to different concepts, frequently in the business environment these two terms are mistakenly used as synonyms because they are two closely related aspects. In fact:
- the calculation of production costs can only be done using data from cost accounting;
- in order to estimate margins on sales, it is necessary to have production costs.
What is the purpose of industrial accounting?
Within different companies, industrial accounting takes on different characteristics that are adapted to the needs of different businesses. In fact, in this area of responsibility of the Finance department, it is not necessary to submit to the requirements imposed by standards, and therefore the choices on the system to be adopted are dictated by other factors, including the sector in which the company operates and the size.
In any case, regardless of the sector in which it is applied, industrial accounting has a very specific purpose: to produce timely data and reports to guide the company’s strategic decisions in the medium and long term. Going into detail, through industrial accounting it will be possible to have greater control:
- Of production costs and sales margins;
- Of inventory values.
Calculation of production costs and sales margins
The main task of industrial accounting is to define what the production costs of various goods or work orders are by means of information on the individual activities carried out in the different departments and their material consumption. This process makes it possible to implement a control mechanism on the various margins, which increases its validity proportionally according to the number of businesses owned by the company.
Thanks to industrial accounting, in fact, it is possible to have an accurate estimate of what are the production costs and the related sales margins based on the price of the finished product, which, however, know that they do not depend solely on production costs, but also on the market.
Going into specifics, we speak of industrial margin, meaning the difference between selling price and the related production costs. For the company to generate earnings, the industrial margin must also be able to cover the business costs that will arise as a result of the production phase; should this not occur, the company would have an unsustainable business. The only way to avert this situation is through the proper calculation of production costs and the subsequent development of an efficient industrial accounting system.
By combining economic accounting data with data derived from industrial accounting, it is possible to have information not otherwise obtainable through general accounting alone. These data and reports can then allow an assessment of the efficiency of each production line in the company and its profit capacity. Once the costs of the various product lines have been delineated, greater control can be gained through:
- the calculation of the margins of each product: this will allow one to push harder on the most profitable ones;
- the evaluation of different pricing strategies;
- the evaluation of the cost-effectiveness of in-house production against contract work.
Having reliable final information, it will then be possible to make reliable statistical analyses and forecasts, which will also allow anticipating events with the construction of economic, capital and financial budgets. Of course, the program drawn up at the beginning of the year, during the budgeting phase, will then have to be constantly monitored, correcting, if necessary, the shot with budget review or forecasting operations.
Stock assessment and control
Finally, industrial accounting also makes it possible to evaluate and control inventory, an area that produces a few effects not only on the operational side, but also on the economic and equity side. Although it is easy to imagine that an overstock ensures a better supply to the various departments or to the sales, an overstock can produce several critical issues first of all an excessive use of financial resources and the economic risk of depreciation due to various factors, such as the perishability of products. Hence the need for an industrial accounting system capable of producing precise and accurate information to optimize the risk of stock holding.
Finally, industrial accounting also allows for the valuation of inventories, a practice that every company must perform at least once a year at the stage of annual financial statements. The valuation of inventories in the absence of an efficient and optimized industrial accounting system turns out to be very complicated, but above all, it risks providing approximate data that do not allow to know accurately the real value of inventories and therefore also the related risk component.
The types of industrial accounting
Depending on the industry and the needs of various companies, it is possible to opt for different types of industrial accounting. These include:
- standard cost industrial accounting;
- actual cost industrial accounting.
Let’s see what they are in detail and when it is preferable to choose one or the other.
Standard cost industrial accounting is the optimal solution for businesses in which the cost of production remains constant over time, or at least undergoes minimal variations. Within this context, in fact, it will be necessary to calculate the cost of production only once, in the budget period, based exclusively on data that do not change over time, and revise it only the following year by updating the values if there are any changes. This solution, however, cannot be chosen by companies that have a production cost that varies significantly throughout the year.
Actual cost industrial accounting, on the other hand, is the best solution for companies that have to undergo market fluctuations and therefore need to review the cost of production on a constant, even weekly basis. This is the case, for example, for all those companies that process products in which the raw material fluctuates greatly throughout the year. In the case where this calculation is not done in a constant and periodic way, one could have untrue margin values, which could lead the company to make unprofitable, if not even counterproductive, choices. In any case, in general, almost all companies, in order to have more accurate and detailed information, opt for both solutions, making a standard cost calculation at least once a year and a final cost calculation monthly.
What are the advantages?
Having an efficient industrial accounting system, flanked by a strong cost accounting system, is the only way for a company to govern market fluctuations by ensuring a product and service proposal in line with the company’s cost and margin requirements. In fact, by periodically keeping track of the price trends of the materials used in production, it is possible to have an accurate and timely estimate of production costs as well, consequently, one can adjust one’s pitch should one be faced with market fluctuations.
In conclusion, companies without an efficient industrial accounting system are more susceptible to market volatility and should changes occur in the price of materials used they may not be able to implement choices aimed at limiting the negative effects of this situation. On the contrary, companies with a timely accounting system have the ability to adjust their focus because of the more accurate margin indications that will be able to guide business decisions in the immediate future.