This System is a combination of Cost Systems: Cost per Process and Cost per Activity. It is applied in continuous production companies, and where products of different lines present different degrees of complexity in the processes that generate them.
The processes or departments is the main functional division in a continuous production factory, the operations carried out in one department are the continuation of the previous one. ABC Costing shows the set of activities that come from the administration, which influence the processes.
Each department is a cost center, each one having objectives, material, financial and human resources. ABC Costing considers all costs and expenses as resources. Resources are consumed by activities and these in turn are consumed by cost objects (Products). This is a methodology that assigns costs to products or services based on the consumption of activities.
When from one process, certain units are transferred to the next, the completion will be to a greater degree, taking with them the costs corresponding to the process and to the previous ones. In the following process, the costs incurred for the period will be added to the transferred cost. The processes act simultaneously, using the period time.
This system is also an Inventory Cost, but with greater accuracy thanks to the better distribution of the Indirect Cost of manufacturing (ABC).
A Cost System can be used for two purposes:
1.- Strategic planning
2.- Operational control
In the first, the cost estimates do not need to be very exact, even with a 10% error there is no problem.
In the second, it is necessary to closely monitor the resource requirements of the activities, the smallest improvement in an activity must be reflected in the cost.
Objectives of the Process Cost System - ABC
- Calculate the undistorted unit cost of the products, in a given production period. Make a Production Cost Report, which separately presents the elements: MD, MOD, CIF. The journal entries for the period will be summarized from this report.
Steps:
- Unit movement report Equivalent unit production Costs to be accounted for Unit costs Costs accounted for
These steps will show how the units produced by the different Departments or processes transit.
ABC Costing will determine what the real value of manufacturing Indirect Costs will be, these being assigned to the processes and then to the products resulting from each process.
This «comprehensive» Management System allows to know the flow of the activities carried out in the organization, which are consuming the available resources and therefore incorporating or imputing costs to the processes.
Characteristics of a Process Cost System - ABC
- During a production period certain units will be started, but not all will be concluded. The production of each Department is classified into :
- Units in inventory at the beginning of the period Units completed and transferred to the next Dept. Units completed but not transferred Units in process at the end of the period
Accounting equation for each Department that will be reflected in a specific account :
| Initial units in process
+ Units that start the process, which are received from the previous apartment. or comes from an input warehouse, such as inputs |
= |
Units finished and transferred
+ Units completed and not transferred + Units in process at the end of the period |
For each process, the Cost of the units participating in a given production process must be recorded, both those that enter and those that leave.
The following must be recorded in each departmental account of products in process :
In the MUST:
Previous department cost i -1 = CT i -1
Cost of previous period balance = CSPA i
Direct material incurred from the process i = MD i
Direct labor incurred from process i = MOD i
Indirect manufacturing costs assigned to process i = CIF i
In HABER:
Costs of units completed and transferred from the process i = CTT i
Costs of units completed and not transferred from the process i = CTNT i
Cost balance of units in process of process i = CEP i
Application example
The aluminum chair factory "La Factoría SAC" works by processes and consists of two departments, in which it produces a product.
We are on the date 10-08-09 and the diagram is as follows:
There are balances of products in process at the beginning of the period between 03-08-09 and 08-08-09. This period already concluded we will consider "current".
Initial balance of units in process of each process at the beginning of the current period.
PEP = Product in process
PP = Put into production
PT i = finished product of process i
RDA = Received from the previous department
CC = Conversion Costs = MOD + CIF
Data is obtained as follows :
What was the ending inventory for the previous period?
It must be added in the PiP Registry, the Income before the first date of the current period (08/03/09 - 08/08/09) which is the date 08/01/09, which is also the balance Initial of Current Period = 12,000
| Product Warehouse in Process (From process 1) | |||||||||
| Income | Expenses | ||||||||
| Code | Date | Hour | Minute | Product Quantity | Code | Date | Hour | Minute | Product Quantity |
| Pro-01 | 08/01/09 | xxxx | xxxx | 12,000 | |||||
| Pro-01 | 08/07/09 | xxxx | xxxx | 44,000 | |||||
| Pro-01 | 08/07/09 | xxxx | xxxx | 44,000 | |||||
| Pro-01 | 08/07/09 | 20 h | 0 min | 1,750 | |||||
| Pro-01 | 08/08/09 | 19 h | 19 min | 3,615 |
How many units were left in process in Dept. 1, at the end of this period (08/03/09 - 08/08/09)?
The Income must be added to the PEP Registry before the first date of the following period, which is the date of 08/07/09 and 08/08/09 which is = 1750 + 3615 = 5.365
How many units were completed in Dept. 1, at the end of this period (08/03/09 - 08/08/09)?
| Finished Product Warehouse (From process 1) | |||||||||
| Income | Expenses | ||||||||
| Code | Date | Hour | Minute | Product Quantity | Code | Date | Hour | Minute | Product Quantity |
| Pro-01 | 08/07/09 | 17h | 48m | 44,000 | |||||
| Pro-01 | 08/07/09 | xxxx | xxxx | 44,000 |
How many units were put into production in the current period?
Units put into production are obtained by difference:
Unit PP = PTy T. + Current PEP - Previous PEP
= 44,000 + 5365 - 12,000
Unit PP = 37,365
Initial data:
Initial Costs (From a previous cost)
(S /.)
|
Detail |
Dept I | Dept II |
| Cost of the Previous Dept. | 0 | 25,320 |
| Material | 16,000 | 10,000 |
| Salary | 7,114 | 3,483 |
| Indirect expenses | 2,048 | 1,720 |
Rest of Data:
(S /.)
Costs incurred in the current period:
| Data record Origin | Detail | Dept I | Dept II | |
| Consumptions | Material | 84,000 | 62,800 | |
| Payroll | Salary | 54,720 | 22,385 | |
| Record of Expenses | Indirect expenses | ? | ? | ABC costing |
I eport Production Cost - Apartment 1
1) REPORT ON THE MOVEMENT OF UNITS of the period (03/08/09 - 08/08/09) of Process 1
| 1- Amount to account | |
| to. Units in process at the beginning of the period | 12,000 |
| b. Units put into production | 37,365 |
| Total available | 49,365 |
| 2- Distributed as follows | |
| to. Units finished and transferred | 44,000 |
| b. Units in process at the end of the period | 5,365 |
| Total available | 49,365 |
2) EQUIVALENT PRODUCTION REPORT
Obtaining equivalent production
From 5:48 p.m. on 08/07/09 to 19:19 p.m. on 08/08/09 there have been 5,365 units whose completion in labor is at 80%, (Example: Chairs, which are missing putty and sand, this last work being proper to the same Dept.)
The hours used in these 5,365 units are 80% of those used for its total preparation, in this Dept.
The total hh required in making 5,365 units is 1,123 man-hours.
The hh used are calculated as follows:
Record of hours worked (With two hours of rest- From 12 to 2 pm)
HI = 8, HS = 18
| Worker's Code | Date | Hour Marked by Clock
(Entry) |
Hour Marked by Clock
(Departure) |
Differences with end time:
17h 48 min |
Differences with decimals |
a = 141.13 hh |
| CP-001 | 08/07/09 | 8: 0 | 19: 0 | 1 : 12 | 1.2 | 17 h 48m are subtracted from each departure time
Add the differences and assign them to a |
| CP-002 | 08/07/09 | 8: 0 | 19: 0 | 1 : 12 | 1.2 | |
| CP-003 | 08/07/09 | 8: 0 | 19:15 | 1 : 27 | 1.45 | |
| CP-004 | 08/07/09 | 8: 0 | 19:15 | 1 : 27 | 1.45 | |
| ………. | ………. | ………. | ………. | ………. | ||
| CP-087 | 08/07/09 | 8: 0 | 19: 0 | 1 : 12 | 1.2 | |
| CP-088 | 08/07/09 | 8: 0 | 20: 06 | 2 : 18 | 2.3 | |
| CP-089 | 08/07/09 | 8: 0 | 20: 06 | 2 : 18 | 2.3 |
Record of hours worked (With two hours of rest - From 12 to 2 pm)
HI = 8, HS = 18
| Worker's Code | Date | Hour Marked by Clock
(Entry) |
Hour Marked by Clock
(Departure) |
Differences with end time:
19h 19 min |
Differences with decimals |
b = 757.35 hh |
| CP-001 | 08/08/09 | 8: 0 | 18: 0 | 8 : 0 | 8.0 | If the Departure time is less than 19h : 19m the time used will be the one linked to the departure time.
If the departure time is greater than 19h: 19m the time used will be the one linked to 19h : 19m Add decimal differences and assign them to b |
| CP-002 | 08/08/09 | 8: 0 | 18:10 | 8 : 10 | 8,167 | |
| CP-003 | 08/08/09 | 8: 0 | 18: 0 | 8 : 0 | 8.0 | |
| CP-004 | 08/08/09 | 8: 0 | 19: 0 | 9 : 0 | 9.0 | |
| ………. | ………. | ………. | ………. | ………. | ………. | |
| CP-087 | 08/08/09 | 8: 0 | 18: 0 | 8 : 0 | 8.0 | |
| CP-088 | 08/08/09 | 8: 0 | 19: 05 | 9 : 05 | 9,083 | |
| CP-089 | 08/08/09 | 8: 0 | 19: 26 | 9 : 19 | 9,317 |
The hh used are: a + b = 898.48 hh
The hours spent in X units will be compared with the hours necessary to complete those X units:
then 898.48 / 1,123 = 0.8 (Comparison of hours spent with required hours)
Q = Equivalent production
Q = 0.8 x 5.365
Q = 4,292 equivalent units
| Equivalent production | |||
| Detail | Regarding the Material (at the beginning) | Regarding the conversion cost | |
| Finished and Transferred Units | 44,000 | 44,000 | |
| In process at the end of the period | 5,365 | 4,292 | Equivalent Production |
| Equivalent Production Sum | 49,365 | 48,292 |
ABC costing
Activity List, Cost-Driver, Ratios
| Activities | Monthly salary
or Monthly amount |
Weekly salary
or Weekly amount |
Cost Driver Amount During 6-Day Week | Cost Driver Ratio
S /. |
Cost-Driver number in the
Process-1 |
Cost-Driver number in the
Pro-ceso2 |
Valorization of
Process 1 |
Valorization of
Process 2 |
|
| one | Sell product | 5,000 | 1,250 | fifteen | 83.33 | 8 | 7 | 666.64 | 583.31 |
| two | Buy supplies | 3,500 | 875 | 8 | 109.38 | 6 | two | 656.25 | 218.76 |
| 3 | Monitor production | 4,000 | 1,000 | 4 x 6d =
24 |
41.67 | fifteen | 9 | 625 | 375 |
| 4 | Monitor packaging | 2,700 | 675 | 4 x 6d =
24 |
28.13 | - | 24 | 0 | 675 |
| 5 | Control quality | 6,300 | 1,575 | 3 x 6d =
18 |
87.5 | 14 | 4 | 1225 | 350 |
| 6 | Plan production | 15,000 | 3,750 | one | 3,750 | 0.5 | 0.5 | 1,875 | 1,875 |
| 7 | Cost production | 1,900 | 475 | 1 x 6d =
6 |
79.17 | 3.5 | 2.5 | 277,083 | 197.92 |
| 8 | Store supplies | 0.3 (1,500) | 450 | 6 x 6d =
36 |
12.5 | 24 | 12 | 300 | 150 |
| 9 | Issue inputs to plant | 0.7 (1,500) | 1,050 | 14 x 6d =
84 |
12.5 | 56 | 28 | 700 | 350 |
| 10 | Monitor plant | 2,000 | 500 | one | 500 | 0.5 | 0.5 | 250 | 250 |
| eleven | Electrical consumtion | 3,000 | 750 | one | 750 | 0.4 | 0.6 | 300 | 450 |
| 12 | Water consumption | 2,500 | 625 | one | 625 | 0.7 | 0.3 | 437.50 | 187.5 |
| 13 | Depreciation of machinery | 2,000 | 500 | one | 500 | 0.4 | 0.6 | 200 | 300 |
| 7,512.47 | 5,962.49 |
Notes:
- Since process 1 includes more material than process 2, when the product is sold, the result of process 1 is sold, it costs more to sell a product with a certain higher value (materials) The inputs that are purchased, are mainly directed to the process 1, which requires more inputs. Process 1 requires more supervision (MD + MOD) Only process 2 generates product for packaging. Process 1 needs more control by Material and MOD. It is homogeneous. Process 1 requires more cost time. 1 needs more time to store supplies Process 1 requires more time to deliver supplies It is homogeneous Process 2 has more equipment that uses electricity Process 1 uses more water Depreciation is greater in process 2
Rest of Data (with ABC Costing)
Costs incurred in the current period:
| Data record Origin | Detail | Dept I | Dept II | |
| Consumptions | Material | 84,000 | 62,800 | |
| Payroll | Salary | 54,720 | 22,385 | |
| Record of Expenses | Indirect expenses | 7,512.47 | 5,962.49 | ABC costing |
3) REPORT ON COSTS TO BE ACCOUNTED
| Detail | Material (at start) | Conversion Costs | CTA |
| Initial balance | 16,000 | 9,162 | 25,162 |
| Costs incurred | 84,000 | 62,232.47 | 146,232,473 |
| CTA | 100,000 | 71,394.47 | 171,394,473 |
4) REPORT ON UNIT COSTS
| Detail | Material (at start) | Conversion Costs | Average unit cost of Process 1 units |
| Accumulated cost: | 100,000 | 71,394.47 | |
| Equiv Production: Units | 49,365 | 48,292 | |
| Unit cost | 2.0257 | 1.4784 | 3,5041 |
5) COSTS ACCOUNTED
| Accounted costs | |||
| Finished |
154,180.4 |
||
| In final process | |||
| Material (MI) | 10,867.9 | ||
| Conversion costs | 6,345.3 | ||
| Cumulative total cost | 171,393.6 |
Units involved in production (both entering and leaving) must be accounted for.
| Accounts and Details | Should | To have | |
| (one) | |||
| Inventory of Production in Process, Dept. 1 | 146,232.5 | ||
| Materials inventory | 84,000.0 | ||
| Payroll payable | 54,720.0 | ||
| Indirect manufacturing costs applied | 7,512.5 | ||
| Recording the costs incorporated by Dept. 1 | |||
| (two) | |||
| Inventory of Production in Process, Dept. 2 | 154,180.4 | ||
| Inventory of Production in Process, Dept. 1 | 154,180.4 | ||
| Recording the transfer of costs to Dept. 2 |
Production Cost Report - Department 2
The steps to carry out to prepare the production and cost report are similar to those of process 1, except that in this the units that are transferred from the previous process must be taken into account with their respective costs.
Mostly during a production process, the first dept. is the one that adds direct material, the sgtes. departments only add conversion cost (MOD and CIF). But in certain productions the addition of MD in departments is necessary. later than the first.
This addition may cause sgtes. effects on units and costs:
- Units are not increased, but costs are.
- Units are increased without cost increase.
- Increase in units and cost.
1) UNIT MOVEMENT REPORT
The units transferred from the department must be included in the first part of this report. above and the units that are added to the process
Using the exposed example we prepare the infore sgte :
| 1- Amount to account | |
| to. Units in process at the beginning of the period | 8,000 pcs |
| b. Received from the previous department (RDA) | 44,000 |
| c. Units added | 10,000 |
| Total available | 62,000 pcs |
| 2- Distributed as follows | |
| to. Units finished and transferred | 44,000 pcs |
| b. In final process | 8,000 |
| c. Losses | 10,000 |
| Total available | 62,000 pcs |
2) EQUIVALENT PRODUCTION
Units in process are multiplied by their level of completion, becoming equivalent. The result includes the units received from the department. previous :
| Equivalent production status | |||
| Detail | RDA | Material (MI) | Conversion costs |
| Finished | 44,000 pcs | 44,000 pcs | 44,000 pcs |
| In final process | 8,000 | 8,000 | 4,000 |
| Equivalent units | 52,000 pcs | 52,000 pcs | 48 000 pcs |
The finished and transferred units with respect to the Material have all the required material, with respect to the Conversion cost as well, with respect to the department. above has all its required cost.
The units in process with respect to the Material have what is necessary, with respect to the cost of Conversion it has 50%, with respect to the previous Dept. it has all the required cost.
3) COSTS TO ACCOUNT
I also test the units received from the department. above, complying with the sum of dept costs. x dept. :
| Accounting costs (S /.) | ||||
| Detail | RDA | Material (MI) | C. Costs | CTA |
| Initial balance | 25,320.0 | 10,000.0 | 5,203.0 | 40,523.0 |
| Costs incurred | 154,180.4 | 62,800.0 | 28,347.49 | 245,327.89 |
| Cumulative total cost | 179,500.4 | 72,800.0 | 33,550.49 | 285,850.89 |
4) UNIT COST
The accumulated cost of each type is divided by the equivalent produced units :
| Unit costs (S /.) | ||||
| Detail | RDA | Material (MI) | C. Costs | CTA |
| Cumulative total cost | 179,500.4 | 72,800.0 | 33,550.49 | |
| Equivalent production | 52,000 pcs | 52,000 pcs | 48 000 pcs | |
| Unit cost | 3.4519 | 1.40 | 0.699 | 5.5509 |
5) COSTS ACCOUNTED
This report is similar to that of process 1, the costs corresponding to the department must be taken into account. above applied to products in process :
| Accounted Costs | |||
| Finished and transferred | S /. 244,239.6 | ||
| In final process | S /. 41,611.2 | ||
| RDA | 27,615.2 | ||
| Material (MI) | 11,200 | ||
| Conversion costs | 2,796 | ||
| Cumulative total cost | S /. 285,850.8 |
Then the units involved in the production process will be counted in journal entries.
| Accounts and Details | Should | To have | |
| (one) | |||
| Production in process inventory, Dept. 2 | S /. 154,180.4 | ||
| Production in process inventory, Dept. 1 | S /. 154,180.4 | ||
| Recording the cost of the units received
from the previous department |
|||
| (two) | |||
| Inventory of Production in Process, Dept. 2 | S /. 91,147.49 | ||
| Materials inventory | S /. 62,800.0 | ||
| Payroll payable | S /. 22,385.0 | ||
| Indirect manufacturing costs applied | S /. 5,962.49 | ||
| Recording the costs incorporated by Dept. 2 | |||
| (3) | |||
| Finished production inventory | S /. 244,239.6 | ||
| Production in process inventory, Dept. 2 | S /. 244,239.6 | ||
| Recording the transfer of finished production |
