Process Cost Accounting
Process cost accounting is a cost management method that does not spread overhead uniformly via percentage surcharges but assigns it to individual business processes and their volume drivers on a cause-based basis.
Process cost accounting is a method of cost and management accounting that allocates the overhead of indirect areas – such as purchasing, logistics, order processing, quality assurance or sales – to the business processes running there on a cause-based basis. Instead of spreading overhead uniformly via percentage surcharge rates on material or direct labour costs, it measures which activities occur in what volume and assigns the costs to the cost drivers of those processes. It thus answers the question of what individual transactions – an order, a picking run, a customer enquiry – actually cost.
The approach was developed in the 1980s, in the Anglo-Saxon world as Activity-Based Costing (ABC), and in Germany shaped largely by Horváth and Mayer as Prozesskostenrechnung. The background was the steadily rising share of overhead in industrial and trading companies: the larger the block of indirect costs grows, the more inaccurate and misleading traditional surcharge costing becomes. Process cost accounting creates transparency here about the cost structure of administrative and dispositive activities.
At a glance
- Allocates overhead to processes on a cause-based basis instead of via blanket surcharges
- German variant of Activity-Based Costing (ABC)
- Key terms: activity, cost driver, process cost rate
- Reveals complexity and variant costs that surcharge costing conceals
- Draws on transaction data and cost centres from the ERP system
How does process cost accounting work?
Process cost accounting builds on the existing cost centre accounting in several steps. First, the main activities in the overhead areas are surveyed and condensed into sub-processes – for example "place order", "check goods receipt" or "handle complaint". For each sub-process a cost driver is determined, that is, a reference variable that reflects resource consumption as well as possible, for instance the number of orders or of checked line items.
The overhead recorded on a cost centre is then allocated to these sub-processes and divided by the annual process volume. The result is the process cost rate: the cost per single process execution, for example 42 euros per order transaction. Related sub-processes can be combined into main processes that span several cost centres. This makes visible what overhead an end-to-end transaction – from customer enquiry to delivery – ties up.
Volume-induced and volume-neutral processes
Process cost accounting distinguishes volume-induced (lmi) and volume-neutral (lmn) processes. Volume-induced processes depend directly on process volume: the more orders, the more effort – their costs can be cleanly allocated via the cost driver. Volume-neutral processes such as department management or general administration, by contrast, occur independently of volume. They are either allocated proportionally or reported separately so that the process cost rates are not distorted.
The process cost rate as a costing basis
The process cost rate makes overhead calculable like direct costs. An order with many small line items, special requests and partial deliveries passes through more chargeable processes than a simple large order – and is valued accordingly more expensively in process costing. This exposes complexity and variant costs that value-based surcharge costing systematically shifts onto high-revenue standard products and cross-subsidises there.
Why process cost accounting matters
The classic surcharge rate assumes that overhead accrues in proportion to material or labour costs. That no longer holds with a high overhead share and a heterogeneous product range. A cheap niche product that triggers the same ordering, checking and advisory effort as a bestseller appears far too profitable in surcharge costing. Process cost accounting corrects this misallocation and provides a more realistic basis for pricing, product range and make-or-buy decisions.
Beyond costing, it is an instrument of overhead management. Because processes become transparent with their volumes and cost rates, expensive, small-scale workflows can be identified and specifically simplified, automated or eliminated. It thus supports process optimisation, target costing and the evaluation of digitalisation projects – for example the question of how much an automated ordering process actually saves compared with manual handling.
Process cost accounting in the ERP system
An ERP system is the natural data source for process cost accounting, because it counts the relevant cost drivers anyway. The process volumes can be read directly from the transaction data: number of orders from purchasing, order line items from sales, picking and goods receipt transactions from logistics, postings from accounting. The associated costs come from the cost centre accounting of the finance module.
A dedicated process cost accounting function is rarely built into standard mid-market ERP systems; large suites offer it in the controlling module, smaller systems usually do not. In practice, the volume and cost data are therefore often transferred via interfaces into a BI or data warehouse tool and evaluated there. Data quality is decisive: only if processes are mapped cleanly and completely in the system do the derived process cost rates yield reliable figures.
Distinction: process cost accounting vs. surcharge costing and contribution margin accounting
Surcharge costing allocates overhead via percentage rates on direct costs and is fast but inaccurate with complex product ranges. Process cost accounting replaces this blanket approach with volume-based process cost rates and reflects resource consumption more precisely – at the price of a higher survey effort.
It differs from contribution margin accounting in perspective: contribution margin accounting separates variable and fixed costs and is suited to short-term decisions. Process cost accounting is geared to the long-term allocation of overhead and treats costs that are fixed in the short term as influenceable via process volume. The two methods do not exclude one another but illuminate different management questions. As a full-costing method, process cost accounting also shares the limit of all full-costing approaches: for short-term price floors the contribution margin remains decisive.
Limits and practice in the DACH region
Process cost accounting is laborious: activity analysis, cost driver determination and volume capture tie up considerable resources, and the rates must be updated when workflows change. It is best suited to overhead-intensive, repetitive areas with well-measurable processes; for creative or highly variable activities it is less suitable. It is often sensible to apply it selectively to a few cost-relevant main processes rather than rolling it out across the board.
In the DACH mid-market, process cost accounting is established as a concept but is operated permanently less often than surcharge and contribution margin accounting. Project-based use is widespread – for instance for a one-off analysis of ordering, setup or order processing costs, or to underpin automation decisions. For external financial reporting under German commercial law (HGB) it plays no role; it is purely an instrument of internal accounting and controlling.
Example
Process cost accounting in the purchasing of a mid-sized company
A mid-sized trading company processes around 12,000 orders a year. The overhead of the purchasing department – staff, systems, allocated administration – adds up to roughly 500,000 euros. Via process cost accounting, the sub-process "process order" is valued with the cost driver "number of orders": roughly 500,000 euros divided by 12,000 transactions gives a process cost rate of about 42 euros per order.
This figure changes the view of the C-range: a small part costing 8 euros that is reordered individually several times a year incurs a multiple of its goods value in ordering costs. The company responds with framework contracts, bundled orders and raised minimum order quantities for C-items and automates standard orders in the ERP system. Process cost accounting thus makes visible an effort that a pure goods-cost view had completely masked.
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