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Home > Knowledge > Key methods of cost accounting

Key methods of cost accounting

Learn all about cost accounting and what it means for your company

12 January 2024 by Rodolfo Intaglietta
Last updated: 13 October 2026
Instructions
Entry level
Accounting
6 min

Contents

Key facts Full costing Variable costing Normal costing Planned costing Activity-based costing Target costing Comparison FAQ Key takeaways

Key facts about this article

Summary

Cost accounting is a central part of business accounting and serves to systematically record, allocate and analyze costs.

Different cost accounting methods help companies present costs transparently, make well-founded decisions and improve how the business is managed.

Depending on the objective, time horizon and company structure, different methods are used, each with its own strengths and areas of application.

What you will learn:

  • What role cost accounting plays in business accounting
  • How full costing, variable costing, normal costing, planned costing, activity-based costing and target costing differ
  • What advantages and limits the individual cost accounting methods have
  • Which method suits which business situation
  • How cost accounting supports pricing and business management

Prerequisites

Basic knowledge

Tools you need:

  • Accounting and cost data from internal accounting
  • Spreadsheets for cost analysis and evaluation
  • Cost accounting or controlling software
  • Internal planning and budgeting documents
  • Reports on products, services and processes

Last reviewed on 22 August 2026. This article was fully reviewed for tax rates, thresholds, deadlines, contribution rates, legal references, procedures and portals. The methods described remain valid. Added on 23 August 2026: a model calculation of the overhead rate with realistic figures from a fictitious joinery business in Zurich.

Key methods in cost accounting

Cost accounting is an essential part of business accounting. It deals with recording, allocating and analyzing costs in order to support management in planning, steering and controlling business operations.

In this article, we take an in-depth look at the different methods of cost accounting. We explain their advantages, areas of application and practical implementation tips to give you a comprehensive overview.

 

Full costing

Full costing is a traditional method of cost accounting. It allocates all costs a company incurs, both direct costs and indirect overhead costs, in full to the products or services, known as cost objects.

This comprehensive cost allocation makes it possible to capture the full cost price of a product or service.

In cost type accounting, all costs are recorded. Cost center accounting then assigns them to the respective cost centers, and cost object accounting finally allocates them to the products or services.

Full costing therefore serves as a basic framework for cost calculation and pricing. Thanks to its structure by cost types, cost centers and cost objects, it also provides a detailed overview of the company’s cost structure.

Advantages:

  • Simple to use and easy to understand
  • Complete cost monitoring
  • Suitable for long-term pricing strategies

Areas of application and examples:

  • Traditional manufacturing industries
  • Cost calculation for products
  • Basis for pricing and profit analysis

 

Model calculation: from the overhead block to the hourly rate

The following figures are a realistic model for a joinery business in Zurich with five productive employees. They are not client data.

  • Production hours: 5 employees × 1,700 billable hours = 8,500 hours per year
  • Overhead costs: CHF 425,000 per year for workshop rent, machines, vehicles, insurance and administration
  • Overhead rate: CHF 425,000 ÷ 8,500 hours = CHF 50 per production hour

On top of this come the direct wage costs. With a monthly salary of around CHF 5,000 (minimum wages 2026 under the collective labor agreement (GAV) for skilled workers in the joinery trade: CHF 4,623 to 5,447) plus around 20% social security costs, each billable hour accounts for around CHF 46. The cost price is therefore around CHF 96 per production hour. Only what the business charges above that is profit. If you do not know your overhead rate, you are setting your hourly rate blind.

 

Variable costing

Unlike full costing, variable costing focuses on variable costs, meaning the costs that vary directly with the production volume of a product or the provision of a service.

Fixed costs, which arise regardless of production volume, are not charged to the cost objects under this method. Instead, they are treated as period costs in the period in which they arise. This distinction allows a more differentiated view of cost structures and is particularly important for short-term decisions.

By concentrating on the variable costs and the contribution margin of a product or service, variable costing provides important data for pricing and for planning production processes. It helps companies determine their break-even point and optimize the profitability of their products or services.

Advantages:

  • Greater flexibility and accuracy in decisions
  • Enables contribution margin analysis
  • Helpful for short-term decisions

Areas of application and examples:

  • Break-even analysis
  • Determining the short-term lower price limit
  • Decisions on the production and sales mix

 

Normal costing

Normal costing is a variant of cost accounting in which costs are charged on the basis of average values from past periods. The aim of this method is to even out fluctuations in actual costs and to provide a more stable basis for cost planning and control.

By comparing the target costs determined in this way with the costs actually incurred, deviations can be analyzed. This allows conclusions about the efficiency of production processes or the accuracy of cost planning.

Normal costing simplifies cost allocation. It is particularly useful for companies that need continuous control and an overview of their cost structures without taking on the complexity of detailed actual cost accounting.

Advantages:

  • Simplified cost allocation
  • Stability in calculation
  • Useful for budgeting and forward planning

Areas of application and examples:

  • Monthly budgeting and cost monitoring
  • Standard costing in production
  • Preliminary costing of products

 

Planned costing

Planned costing is an advanced method of cost accounting. It aims to determine future costs (planned costs) on the basis of planned production volumes and processes.

This method enables proactive steering and control of costs by comparing planned costs with the costs actually incurred. By identifying cost variances, companies can take action early to optimize their cost structures and use their resources more efficiently.

Planned costing supports not only cost control but also strategic planning and decision-making, as it provides detailed insights into what causes costs and how they develop.

Advantages:

  • Promotes cost awareness and efficiency
  • Enables detailed variance analyses
  • Supports proactive cost management

Areas of application and examples:

  • Cost control and cost management
  • Performance measurement and management
  • Increasing efficiency in production

 

Activity-based costing

Activity-based costing, also known as process cost accounting, is a method that aims to allocate overhead costs precisely to the products or services that actually cause them.

By analyzing the individual steps in the production process or in the provision of a service, this method enables a detailed allocation of costs to the respective cost objects.

Activity-based costing increases the transparency of cost structures, especially in the indirect areas of a company, and helps to identify potential for cost reductions.

It is particularly suitable for companies with complex manufacturing processes or a high share of overhead costs and helps to increase efficiency and competitiveness.

Advantages:

  • Greater transparency of overhead costs
  • More accurate product costing
  • Identification of potential savings

Areas of application and examples:

  • Service companies
  • Complex manufacturing processes
  • Cost management in indirect areas

 

Target costing

Target costing is a market-oriented cost accounting method. It aims to design the costs of a product or service so that they match the prices set by the market.

The starting point is the price achievable on the market minus a desired profit, which gives the so-called target costs. This method promotes cost-conscious product development and design from the very beginning and forces companies to constantly look for ways to reduce costs and increase efficiency.

Target costing helps companies develop competitive products and services that meet customer requirements and expectations. It also promotes close cooperation between design, production, marketing and controlling.

Advantages:

  • Market-oriented product development
  • Encourages cost reductions and efficiency gains
  • Supports strategic cost management

Areas of application and examples:

  • Product development in highly competitive markets
  • Pricing of new products
  • Cost-benefit analysis for product innovations

Sound cost accounting starts with sound accounting.

Without structured financial data, even the best cost accounting methods remain theoretical. We create the basis for well-founded decisions.

  • Structured, digital financial accounting with a clear account logic
  • Transparent reports as a basis for full costing, variable costing or planned costing
  • Ongoing reconciliation instead of surprises at year-end
  • Personal support from a Treuhänder mit eidg. Fachausweis (Swiss fiduciary with Federal Diploma of Higher Education)

Set up your accounting in a structured way

Comparison of the methods

The six key methods of cost accounting are full costing, variable costing, normal costing, planned costing, activity-based costing and target costing. They differ above all in how they treat fixed costs and in their time reference.

Each method has its specific advantages, areas of application and challenges. Below, we compare the key methods of cost accounting to give companies guidance in choosing the right cost accounting method.

 

Full costing vs. variable costing

The main difference between full costing and variable costing lies in the treatment of fixed costs. While full costing charges all costs (both fixed and variable) to the cost objects, variable costing only takes variable costs into account.

Full costing provides a comprehensive view of cost structures and is particularly useful for long-term pricing and profit analysis.

Variable costing, on the other hand, allows more flexible handling and is particularly advantageous for short-term decisions, as it gives a direct view of the contribution that individual products or services make to the company’s success.

 

Normal costing vs. planned costing

Both normal costing and planned costing serve cost control and cost planning.

Normal costing uses historical average values to plan and control costs. This provides a stable basis for cost allocation, but because it is based on past values, it can react less flexibly to changes.

Planned costing, on the other hand, is based on costs expected in the future and enables a detailed variance analysis by comparing planned and actual costs. This promotes proactive cost management and efficient use of resources.

 

Activity-based costing vs. target costing

Activity-based costing focuses on charging overhead costs precisely to the cost objects through a detailed analysis of the company’s processes. It is particularly suitable for companies with complex production processes or a high share of overhead costs.

Target costing, on the other hand, is a market-oriented method that concentrates on designing product costs based on market prices. It is ideal for highly competitive markets in which the cost structure is decisive for market success.

 

Decision guide: which method for which company?

The choice of the right cost accounting method depends on various factors, such as the industry, the size of the company, its market position and its specific business objectives.

Companies in stable, traditional industries with long product life cycles could benefit from full costing. Dynamic companies in highly competitive markets with short product life cycles, on the other hand, should rather rely on variable costing or target costing.

Companies with complex production processes or a high share of overhead costs should consider activity-based costing to increase transparency and efficiency.

We as a fiduciary firm are happy to support you with this complex decision. Our expertise allows us to analyze the specific requirements of your company together with you and to select the optimal cost accounting method.

We offer not only support in implementing the chosen method, but also ongoing advice to increase the efficiency and profitability of your company. Let us work together to lay the foundation for successful cost control and business management.

Frequently asked questions about cost accounting

Can different cost accounting methods be combined to allow a more comprehensive analysis?

Yes, companies can certainly combine different cost accounting methods to allow a more detailed and comprehensive analysis of their cost structures.

By combining methods, such as full costing for long-term decisions and variable costing for short-term decisions, companies can gain a deeper understanding of their costs and improve their strategic planning.

This approach makes it possible to use the advantages of each method and to develop a tailored cost accounting system that meets the specific requirements of the company.

How often should the chosen cost accounting method be reviewed and adjusted?

The chosen cost accounting method should be reviewed and adjusted regularly, ideally once a year or whenever there are significant changes in the business environment or the company structure.

This regular review helps to ensure that the cost accounting method continues to meet the current needs of the company and contributes effectively to decision-making.

Changes in production technology, market dynamics or internal processes can make it necessary to adjust the cost accounting methodology.

What role do digital tools and software play in implementing cost accounting methods?

Digital tools and software play a decisive role in implementing cost accounting methods efficiently, as they automate and simplify data collection, processing and analysis.

Modern cost accounting software offers extensive functions that support detailed cost analysis, the simulation of different scenarios and the preparation of meaningful reports.

Using these tools allows companies to make their costs transparent, save time and reduce sources of error, which ultimately leads to better-founded decisions.

How can you measure the effectiveness of a cost accounting method once it has been implemented?

The effectiveness of a cost accounting method can be measured against various criteria, including the accuracy of cost allocation, the improvement in decision-making and the efficiency of internal processes.

One indicator of effectiveness is how well the method helps management understand and control costs, as well as its ability to respond to changes in the business environment.

In addition, stakeholder satisfaction and the positive effect on the company’s financial performance can serve as a measure of the success of the cost accounting method.

Are there industry-specific recommendations for choosing a cost accounting method?

Yes, there are industry-specific recommendations for choosing a cost accounting method, because different industries have different cost structures and business models.

For example, manufacturing companies often benefit from activity-based costing because of its detailed cost allocation in complex production processes, while service companies might prefer variable costing to analyze the direct costs of their services.

Target costing is particularly suitable for industries with strong competition, in which pricing is critical for market success.

Ultimately, the choice of method should be based on a thorough analysis of the specific needs and objectives of the company.

How does the choice of cost accounting method affect the pricing of products or services?

The choice of cost accounting method has a direct influence on pricing, as it determines how costs are recorded, analyzed and allocated to the products or services.

Full costing, for example, can lead to pricing that covers all costs, while variable costing allows prices based on variable costs, which are therefore potentially more competitive.

Target costing aligns pricing directly with the market by designing cost structures so that they match market prices and still allow a profit.

The choice of method should therefore be made strategically in order to optimize competitiveness and profitability.

Which cost accounting method is best suited for a startup?

For startups, variable costing is often particularly suitable, as it allows flexible handling of costs and focuses on variable costs.

This method helps young companies quickly determine their break-even point and understand the lower price limit for their products or services.

Because startups often have to make quick decisions in their early phase and operate in a dynamic market environment, variable costing provides the agility needed to respond effectively to changes.

Cost accounting is theory. We help you put it into practice.

Whether full costing, variable costing or individual controlling solutions: what matters is not the method, but clean implementation in your financial structure.

  • Digital accounting as a stable basis for decisions
  • Individual controlling for more transparency
  • Ongoing reports instead of annual financial statements alone
  • A personal contact person with an entrepreneurial perspective

Structure your accounting professionally now

Key takeaways

  • Cost accounting creates transparency about cost structures
  • Different methods serve different decision-making purposes
  • Full costing and variable costing differ in how they treat fixed costs
  • Planned costing and normal costing support cost control
  • Activity-based costing and target costing increase cost awareness
  • The right method depends on the objective and the company structure

 

Assessment from our fiduciary practice

Cost accounting is a key part of business accounting: it makes it possible to record, allocate and analyze costs in support of planning and control.

This article presented various cost accounting methods: full costing, variable costing, normal costing, planned costing, activity-based costing and target costing. Each of these methods offers specific advantages and suits different business objectives.

Choosing the right cost accounting method is of great importance for a company’s cost control, pricing and strategic planning.

A careful analysis of the individual factors of your company should come before the choice, in order to increase efficiency, competitiveness and profitability.

Sources

  1. Paritätische Kommission Schreinergewerbe. (2026). Mindestlöhne 2026. Retrieved 23 August 2026 from zpk-schreinergewerbe.ch
A competent tax advisor stands in a modern fiduciary office, ready to provide client-focused advice.

Author

Rodolfo Intaglietta

Rodolfo Intaglietta is the founder and managing director of ONE! Treuhand GmbH. As a Treuhänder mit eidg. Fachausweis (Swiss fiduciary with Federal Diploma of Higher Education) and Diplomierter Experte in Rechnungslegung und Controlling (Expert in Accounting and Controlling with Advanced Federal Diploma of Higher Education), he supports entrepreneurs throughout Switzerland with clear figures, digital processes and personal advice on an equal footing.

The qualification “eidg. diplomierter Experte in Rechnungslegung und Controlling” corresponds to qualification level NQF 8 and is therefore at the highest level of education, comparable to a doctorate in terms of professional depth and responsibility.