Cost Accounting in Transport

According to the definition in a renowned textbook (Matz, A., Curry, O.J., Frank G.W. (1957) Cost Accounting, South-Western), cost accounting is a tool for Management designed to determine the cost of products, operations, and functions, and to compare actual costs and expenses with budgets and standards; it also provides the cost data necessary to carry out comparative economic analyses, thereby enabling Management to make informed decisions in line with sales policies, production methods, purchasing procedures, financial plans, and capital structure. The three fundamental phases of cost accounting are cost recording, control, and analysis.

How does cost accounting differ from broader financial accounting?

To put it simply, financial accounting is a tracking process carried out in relation to the company’s external transactions; cost accounting (or management accounting), on the other hand, is an internal tracking process.

The purpose of financial accounting is to record all exchange transactions (sales, purchases, collections, payments, etc.) between the company and the external environment; it is mandatory, as required by statutory and tax regulations; the financial statements represent its summary document. Financial accounting is always historical and is therefore limited to providing information on past operations.

Cost accounting is not required by law, and there is no predefined methodology or structure for implementing it; its areas of application can relate to both historical analyses and forward-looking estimates.

As shown in the definitions, because it is not a mandatory process, unlike financial accounting, not all companies have a cost accounting system in place. In the sector covered by this article, road transport, the above is particularly evident, also for the reasons outlined below.

A “third-party road transport” company provides freight transport services on behalf of manufacturing clients that are independent from it (the goods are not owned by the transport company). This “transport service” constitutes the transport company’s actual product and, as such, is subject to pricing for customers.

How is this rate determined?

In theory, as with any type of product or service, the rate should be determined by the cost of delivering the service plus a profit margin. In practice, however, in this particular sector, this is not always the case.

Road freight transport is an industry where, on specific lanes, there is a substantial supply of capacity from transport operators. This high level of supply establishes fairly well-known “market rates” for industry operators. In road transport, it is common practice—especially for smaller companies (which are widespread)—to “adapt” their rates to market levels, even without an accurate understanding of the actual costs required to perform that specific service.

Market awareness is certainly important: knowing the rate levels applied at any given time on specific lanes prevents transport companies from quoting above those levels and operating “out of the market”, which would result in losing business.

However, the practice of solely adapting one’s rates “to the market”, without knowing internal costs in detail, is very risky from a business perspective. The so-called “market” is in fact driven by operators who may have completely different cost structures (for instance, because they operate from different geographic regions or have different company sizes).

Simply knowing the market in which one operates is therefore not enough: it is essential to know your costs in detail to understand how much is actually “earned” (i.e. what the profit is) when providing a specific service.

Especially when compared to other sectors, what was just said may seem obvious and trivial; in road transport, however, because of the practice described above, it is not at all. It is therefore essential, in this industry as well, to restore cost awareness.

Every transport company, even small ones, should therefore develop a cost accounting system, starting from theory and then implementing it in practice. Only by developing such a system is it genuinely possible to know costs in the most detailed way possible and, consequently, to know for each individual lane the exact cost and profit in relation to respective revenues.

Knowing your costs enables you to take action:

• retrospectively, to understand which lanes offer the highest margins;

• at the quoting stage, to understand the true dynamics of your pricing and offer rates that are genuinely economically sustainable for the company, regardless of the market conditions in which it operates.