It must be borne in mind that the cost of production is one of the most important indicators to consider in the institutions to execute and carry it out. Therefore, the more efficient their work, the less resources will be invested in their production and, consequently, the lower the amount of expenses.
The cost of production should become a faithful gauge of the use of material, labor and financial resources in the production process, because, in addition, together with the indicators of the volume of production, it determines the level of profit that the organization obtains.
The cost is also the basis for the formation of the prices of the products and services produced. That is why it is so important to obtain the maximum production, with the minimum necessary expenses, in order to guarantee the gradual increase in profits or utilities.
By planning the cost of production, it is possible to trace the optimal magnitudes of expenses to undertake production, through the company's operating results, technical-economic factors and established indicators.
The planning of the cost serves as a control instrument to the management of the institutions, because it allows them to know, systematically and in an agile way, any deviation that occurs in the actual execution of production with respect to the planned plan, in each of the areas and the entity as a whole.
All of the above explains the vital importance of the correct planning of the cost of production for the performance of the economic work of the organizations, since this is the way of knowing the expenses that the institution must incur to elaborate its production and achieve better control of what is really happening and thus be able to define who is responsible for the detected deviations.
It is within this framework that the organization of work related to cost by areas or levels of responsibility constitutes a spring of great interest, insofar as it makes it possible to confer an eminently active character on this category, as a tool of singular utility in the direction of economic phenomena.
Areas of responsibility in cost control
A determining criterion for the definition of the areas is that each one has a boss who can control expenses and influence their magnitude with their actions, so that they can answer for their behavior during a certain period.
What are the productive areas?
In the specific case of these areas, their functions can be generalized, as follows:
- Systematically control that the planned production plans are fulfilled in each one, with the aim of being able to materialize the final production plan. Ensure that the production process that takes place in them is optimized. Prepare the budget of expenses of each area, from conformity with the norms of material consumption and the rest of the items it includes. Ensuring that the productions have the required quality. Ensuring strict compliance with the previously prepared expense budget. Budgeted Ensure corrective action on detected deviations.
What are the control accounts and production centers?
An element of extraordinary importance to consider in developing the cost system is the recording of expenses.
The registry is organized with the correct definition of the accounts and the cost centers to be used.
Control accounts are expense accounts where these are recorded, according to the use that resources receive according to different categories. For example, management, marketing, indirect production expenses, etc.
Cost planning is carried out by areas of responsibility and within these is disaggregated precisely down to the cost center level.
A cost center is the minimum unit of expense collection.
Considering the direct and indirect nature of these, the cost centers are classified as direct and indirect.
Direct cost centers are those in which expenses related directly to the product or service are recorded.
For their part, indirect cost centers are those in which expenses are recorded that due to their characteristics cannot be directly identified with the product or service.
The expenses that are registered in the indirect cost centers can be classified into two types:
- Indirect expenses that are generated within the institution (general) Those that originate within each productive area.
Thus, general indirect expenses are those that are controlled by non-productive areas and have a common incidence on all productive areas. These may include administration, maintenance and quality control expenses.
These expenses are distributed immediately among the direct cost centers, without going through those that group their own indirect costs, so that unnecessary double distribution is avoided to take them to the direct cost centers.
General indirect expenses are carried by redistribution or apportionment to the direct cost centers of all the areas that receive services.
In the specific case of the organization's management expenses, these are distributed among the direct cost centers.
Own indirect expenses are those that control the productive areas, which are charged to indirect cost centers identified with them, to avoid their distribution among areas that are not related to those expenses and thus gain precision in the cost calculation.
These expenses classify the energy consumed by the area, the expenditure for consumption of auxiliary materials and depreciation, among others.
Classification of expenses
In order to guarantee the organization of the registration, calculation and analysis of production costs, so that reserves are revealed to reduce costs and economic calculation is facilitated in the organization, it is necessary to group expenses in groups similar to each other or homogeneous, based on certain characteristics or parameters.
These characteristics find their expression in the principles that serve as the basis for the classification of expenses, which are detailed below.
For the responsibility of its control
They are classified as controllable and uncontrollable. This classification is of great importance due to the relationship it has with the areas of responsibility, because they define the expenses that each area will control.
Expenses are considered controllable by an area when its leader has a decisive influence on its increase or decrease.
There are also within this classification the partially controllable expenses such as the case of an institution, the expenses originated by maintenance and quality control services, as well as the management expenses received by the areas that complete the production process.
They are called partially controllable, since the areas respond only for a part of the economic significance of the deviations between the actual execution and the budgeted behavior of expenses.
Regarding maintenance, repairs and quality control, these departments control the efficiency of their work, considering the budget and performance. The areas that receive such services control the extent to which their own efficiency contributes to their savings or over-spending, or by comparing real time and the standards required to carry out the actual execution of their level of activity.
Finally, in the case of the entity's management expenses, the management will be responsible for the budget execution, while the terminal production areas will do so to the extent that the optimal use of the budgeted capacities contributes to the relative savings of the expenses received.
It is necessary to clarify that, within the controllable expenses by areas, the depreciation of the basic means and the energy consumption for lighting and as the driving force of the equipment have been included.
On the other hand, to control depreciation expenses, the authors propose that these expenses be controllable at the level of each area of responsibility, considering the need to guarantee the optimal use and exploitation of the equipment, with a view to avoiding utilization of capacities, as it influences inversely proportionally on unit fixed costs. Said control is required to provide the head of each area with the necessary authority to decide on the destination of the idle or underused basic means.
Regarding the controllable energy expenditure by area, it should be noted that, although there is no meter meter in each, the allocation of this expenditure as controllable by areas will help to encourage energy savings by area in the institution as a whole. This expense is considered controllable by the areas from the distribution of the electrical consumption of the equipment and for the lighting between them.
For the incorporation to the product or service
They are classified as direct and indirect.
Expenses are considered direct when they are directly linked to the product or service unit:
- Consumption of productive material. Wages. Social Security. Access to databases. Document reproduction service. Printing service. Design service. Editing service. Others.
Indirect expenses are those that do not directly intervene in the elaboration of the product or service:
- Energy. Administration expenses Amortization Repairs Maintenance expenses
For their behavior regarding the level of activity
- They are classified into variables and fixed.
The variables are those that are modified in the same proportion as the activity level; they tend to vary proportionally in their total magnitude and remain constant in their unit magnitude. Within this group are located:
- Materials that are directly identified with the production unit in the production areas. Materials whose total magnitude varies in the same proportion as the respective levels of maintenance and quality control activity. Energy for lighting and as the driving force of the equipment.
Fixed expenses are those whose total magnitude remains unchanged with respect to changes in the level of activity, and vary inversely proportional to it in its unit magnitude. Among them are classified:
- All expenses in the administration area, except materials for maintenance and electrical energy, in production and quality control areas, auxiliary materials, workers' wages and social security, and depreciation of basic resources.
Due to its economic nature
They are classified into elements. The element is an economic concept associated with the expense that allows quantifying the material, labor and financial resources in which such expenses are expressed. It includes those expenses acquired and used by the center, whether or not they are associated with the production process. Its purpose is to homogenize expenses. It facilitates the calculation of the games.
Cost card elements
The cost card is used to record the expenses generated by the elaboration of the products or service, and the provision of the information services provided by the Institute of Information on Science and Technology of the Ministry of Science, Technology and Environment.
Raw materials and materials:
- Consumption of productive material Office supplies Others Surcharges Discounts
Auxiliary materials:
- For maintenance For cleaning and cleaning Parts and spare parts Other Surcharges Discounts
Fuels
- Special gasoline Regular gasoline Diesel Lubricants
Energy
- Electricity consumption Other types of energy
Wages
- Staff salaries Paid rest
Social Security
- Contribution to social security Social security payments
Amortization
- Other monetary expenses Personnel allowances Food Telephone expenses E-mail expenses Postal mail expenses Access to databases Acquisition of literature Document reproduction service Translation services Printing services Design services Editing services Current repairs Advertising expenses Supplies for gastronomy Transport services Travel expenses
For its emergence and destiny
They are classified into games.
Heading is an economic concept associated with cost. It includes the expenses of the elements that are part of the cost, in order to identify them with the place where they originate.
They make it possible to calculate the total and unit cost, whether planned or real, allowing the cost card to be prepared.
The formation of the “raw materials and materials” items, as well as “wages and social security”, is carried out from the accumulated expenses in the corresponding elements or sub-elements, within the direct cost centers.
The formation of the “indirect production expenses” and “general management expenses” items are obtained as a result of the distribution between the direct centers of the expenses accumulated in the indirect centers of the same name, except the “maintenance” item and operation of equipment ", which is formed by the expenses assigned to the direct cost centers, from the distribution of the accumulated in the cost center" maintenance and repairs ", which also includes the accumulated depreciation in the cost centers indirect from productive areas.
