Procurement Glossary
Functional costing: definition, methods and application in Procurement
November 20, 2025
Functional cost accounting is a key cost accounting tool that structures costs according to operational functions and activities. In Procurement , it enables procurement costs to be precisely allocated to specific functional areas and supports strategic decisions. Find out below what functional cost accounting is, which methods are used and how it contributes to the optimization of procurement processes.
Key Facts
- Structures costs according to operational functions instead of cost centers
- Enables precise allocation of procurement costs to activities
- Supports make-or-buy decisions through transparent cost analysis
- Forms the basis for strategic supplier evaluation and selection
- Improves cost transparency in complex procurement processes
Contents
Definition: Functional costing
Functional cost accounting systematically allocates costs according to operational functions and activities instead of traditionally classifying them according to cost centers.
Basic principles of functional cost accounting
The system is based on the identification and evaluation of business processes and their cost drivers. The central elements are
- Function-oriented cost allocation
- Activity-based cost allocation
- Process-oriented cost analysis
- Cost allocation based on causation
Functional cost accounting vs. traditional cost accounting
In contrast to traditional cost center accounting, functional cost accounting focuses on activities and their resource consumption. It offers a more detailed view of how costs are incurred and distributed.
Importance of functional cost accounting in Procurement
In the area of procurement, it enables a precise analysis of process costs and supports the cost driver analysis for strategic decisions.
Methods and procedures
Functional cost accounting is implemented using structured methods for identifying, evaluating and allocating functional costs.
Activity-Based Costing (ABC)
This method identifies activities as cost drivers and allocates resource consumption according to cause. In Procurement , procurement activities such as supplier search, negotiation and order processing are evaluated separately. Activity-based costing forms the methodological basis for this.
Functional analysis and cost allocation
Systematic recording of all purchasing functions and their resource requirements enables precise cost allocation. Key steps include:
- Identification of main functions
- Evaluation of resource consumption
- Allocation to cost drivers
Integration into procurement controlling
Functional cost accounting is integrated into procurement controlling and supports the cost-benefit analysis of procurement strategies.
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Key figures for controlling functional cost accounting
Specific key figures enable the evaluation and control of functional cost accounting in the procurement area.
Functional cost share and distribution
The share of individual functions in the total costs shows cost priorities. Key figures such as functional cost ratio per activity and cost distribution by functional area enable targeted optimization. Benchmarking with industry standards identifies potential for improvement.
Accuracy of cost allocation
Deviation analyses between planned and actual functional costs measure system accuracy. ROI key figures evaluate the benefits of functional cost accounting compared to the implementation costs.
Process efficiency indicators
Process efficiency indicators such as cost driver productivity and functional costs per transaction support continuous improvement. Integration with budgeting processes enables precise planning.
Risks, dependencies and countermeasures
The implementation of functional cost accounting entails specific risks that can be minimized by taking appropriate measures.
Complexity and implementation effort
High implementation costs can lead to resistance. Incomplete functional analysis jeopardizes the validity of the system. Gradual implementation and comprehensive training significantly reduce these risks.
Data quality and accuracy
Insufficient data quality leads to incorrect cost allocations. Regular validation of cost drivers and continuous system adjustments are required. Target/actual comparisons reveal deviations at an early stage.
Organizational dependencies
Success depends on the acceptance of all those involved. Unclear responsibilities can impair functionality. Clear governance structures and regular controlling processes provide a remedy.
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Practical example
An automotive supplier implements functional cost accounting to optimize its procurement strategy. The company identifies five main functions: Supplier search, negotiation, order processing, quality inspection and supplier support. A detailed cost analysis reveals that 40% of procurement costs are attributable to quality inspection. This insight leads to a realignment of the supplier strategy with a focus on qualified suppliers and reduced inspection costs.
- Cost transparency improved by 60%
- Procurement costs reduced by 15%
- Supplier portfolio strategically optimized
Trends & developments in functional cost accounting
Modern developments in functional cost accounting are characterized by digitalization and AI-based analysis methods.
Digital transformation of cost accounting
Automated data collection and analysis are revolutionizing functional costing. ERP systems enable real-time analysis of functional costs and improve the accuracy of cost allocation. Integration with purchasing controlling systems creates new transparency.
AI-supported cost analysis
Artificial intelligence enables more precise cost driver identification and automated function evaluation. Machine learning algorithms recognize patterns in cost data and continuously optimize function allocation.
Sustainability-oriented functional cost accounting
Integration of sustainability aspects into the functional assessment is becoming increasingly important. Environmental and social costs are taken into account as additional functional dimensions and included in the total cost of ownership.
Conclusion
Functional cost accounting is a valuable tool for modern procurement organizations that creates a precise basis for decision-making through activity-based cost analysis. Its successful implementation requires a systematic approach and organizational support, but offers considerable advantages for cost transparency and strategic procurement management. In times of digital transformation, it is increasingly being enhanced by AI-supported analysis methods and remains a central component of modern procurement controlling.
FAQ
What distinguishes functional cost accounting from conventional cost accounting?
Functional cost accounting allocates costs according to activities and functions, whereas traditional systems are cost center-oriented. This allows costs to be allocated more appropriately and provides better transparency of resource consumption in specific business processes.
How is functional costing used in Procurement ?
In the procurement area, purchasing activities such as supplier search, negotiation and order processing are evaluated as separate functions. This supports make-or-buy decisions, supplier evaluation and process optimization through precise cost transparency.
What are the prerequisites for implementation?
Successful implementation requires detailed process analysis, high-quality cost data and organizational support. In addition, suitable IT systems and trained employees are necessary for sustainable system use.
What are the advantages of functional costing?
The main benefits include improved cost transparency, a more precise basis for decision-making and optimized resource allocation. Companies can better identify cost drivers and derive targeted improvement measures.
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