The planned management of the economy on a scientific basis is only possible if you have the most complete and comprehensive knowledge of the economic activity carried out in companies.
It is about directing the economy in a correct and objective way, which is feasible if the necessary economic information is available, capable of providing a representation of the main economic events and processes in a timely, rational and reliable way.
The improvement of information systems has been a consequence of the development and complexity achieved by economic activity, which has also had an impact on the criteria to be followed by accounting specialists at the different stages in which this progress is framed.
Accounting plays a decisive role within the information system of a company, its objectives are oriented towards the communication of useful information to its different users. The economic and financial information of the company is of interest for both internal and external use and the Accounting takes into account both aspects.
Accounting is the process by which the economic information of an organization or company is identified, measured, recorded and communicated, so that managers can assess their situation.
Accounting as a science for its study was divided into three branches, which received the name of Financial Accounting, Cost Accounting and Management Accounting.
The manipulation of production costs to determine the unit cost of products is strong enough to justify a subsystem within the general accounting system, responsible for all the details regarding production costs.
Production costs are at the center of business decisions, since any increase in production costs usually means a decrease in company profits. In fact, companies make decisions about production and sales in view of the costs and sales prices of the goods they launch on the market.
It is in the company, where the goods and services necessary for the development of society are created, through different processes and the use of material, human and financial resources, hence the importance of knowing, its characteristics, organization, productive flow, value chain, in order to identify the elements that must be measured and controlled through the procedures that allow the recording of expenses, the planning, calculation and analysis of costs.
The Association of Accountants of the United States defines Cost Accounting in the Statement on Management Accounting Number 2 as a “technique or method to determine the cost of a project, process or product, used by the vast majority of legal entities, in a company, or specifically recommended by an authorized accounting group ”.
Cost Accounting is a part of Accounting that aims to capture, measure, record, measure and control the internal circulation of company values, in order to provide information for decision-making on production, training of internal cost prices and on the sale price policy and analysis of the results, by contrasting with the information revealed by the factor and product market on the basis of the technical, economic and social laws that govern the behavior of business phenomena.
Neuner defines cost accounting as an expanded phase of general accounting for an industrial or commercial entity, which quickly provides management with data related to the costs of producing or selling each item or supplying a particular service.
According to Charles T Horngren, Cost Accounting for management purposes constitutes the most dynamic phase in the entire field of accounting because it is intertwined with the administration itself. This is a service function whose main purpose is to help management plan and control operations.
Polimeni and other authors point out that "the accounting system that provides the information to measure the costs of a product, the performance and the cost of operations is called cost accounting or management accounting system."
Accounting for costs incurred in companies or any type of organization is a great help for the management of organizations because it helps you plan and control your activities within that company or organization. Thanks to cost accounting, it can be determined at any time that the company needs to know how much it costs to produce or sell a product or service performed in it. Knowing the costs is a key element of the correct business management, so that the effort and energy that is invested in the company of the expected results.
Costs and expenses
Cost is fundamentally an economic concept, which influences the result of the company. It forms the basis for product costing, performance evaluation, and managerial decision making.
The production cost expresses the magnitude of the material, labor and monetary resources necessary to achieve a certain volume of production with a certain quality. It is made up of all the expenses related to the use of tangible fixed assets, raw materials and materials, fuel, energy and workforce in the production process, as well as other expenses related to the manufacturing process., all expressed in monetary terms.
The cost is assumed as the resources sacrificed or lost to achieve a specific objective, the costs are measured in the conventional accounting form, with monetary units that have to be paid for the goods and services. Cost accrual is the collection of cost information in an organized way through an accounting system that accumulates at least the actual costs.
Cost is defined as the "value" sacrificed to obtain goods or services. The sacrifice made is measured in monetary terms at the time benefits are obtained. When the benefits are obtained, the costs are converted to expenses. An expense is defined as a cost that has produced a benefit and has expired. Expenses are compared to income to determine profit or loss for a period.
Production cost elements
The cost of production is made up of the so-called three elements of the cost of production: direct material, direct labor, and manufacturing overhead.
Materials in a manufacturing activity are goods that are transformed or integrated to be incorporated into the manufacturing process of a product. They can constitute natural goods of animal, vegetable and mineral origin or semi-finished products corresponding to the stages of the production process.
The materials that through physical or chemical transformation processes constitute the materiality of the finished products receive the generic name of raw material, although when they are of secondary importance such as nails, screws, varnishes, etc. they are called auxiliary materials.
This element is fundamental for the specific weight that within the industrial activity it has in the cost of production.
An adequate record and control of material expenses will condition a faithful data about the cost of production, hence the information on it must reflect each of the moments required for acquisition, conservation and consumption.
Production labor is used to convert raw materials into finished products, it is a service that cannot be stored and demonstrably does not become part of the finished product. Its value is reflected through the wages and salaries earned by workers.
The advancement and use of technology have led the labor force to lose prominence in the production process and represent a lower percentage within the production cost structure.
Indirect manufacturing costs are made up of all production costs that are different from direct materials and direct labor, or in other words, all production costs that do not constitute direct materials or direct labor. Examples of indirect manufacturing costs include costs for water, electricity, telephone, depreciation, insurance taxes, etc.
Cost Systems
An adequate control of the material, human and financial resources in the production process will be guaranteed with the establishment of methods, rules and procedures that ensure the timely and accurate recording of the information derived from the use of resources in economic activity. of the company and that can be used in order to facilitate control or to determine the cost of the product.
The cost systems constitute the set of rules, methods and procedures that are required for planning, recording expenses, calculating and analyzing cost in the organization.
A cost system must be able to adequately measure the expense of the resource invested in the production of a material good and to show the possible deviations that may arise between what has been spent and what should be spent, also responding to the business strategy. The cost systems are aimed at the following basic objectives: the departments, the products or services and the activities.
The determining factor to predict which cost system should be implemented is the type of activity carried out and also to be clear about what you want to measure, the object of costing, that is, the cost of the product, of an area, of an activity, of the quality, etc.
Companies often taking into account the type of manufacturing process adopt one of the basic cost systems:
- Process cost system. Cost system for work orders.
Cost for Orders and Cost for Processes
Work Order Cost systems are used in organizations where production is low in mass, the process process is discontinuous for heterogeneous products.
It is applicable to companies where it is possible and more practical to distinguish lots, subassemblies, assemblies and finished products of a great variety.
The manufacture of each batch is undertaken through a work or production order. The batches are accumulated for each one separately and obtaining the unit costs is a simple division of the total costs by the number of units produced in each batch.
The work order cost system is used where the products are different according to the needs of materials and conversion and respond to customer requests, based on previously established specifications and specific needs.
The organizations that commonly use this system are:
- Garment industry. Furniture industry. Manufacture of spare parts. Printing industry. Auditing and consulting services. Buildings. Repair services Hotel services Gastronomic services Shipyards Aeronautics Construction
Among the fundamental characteristics of this system we find:
- It allows to separately collect each one of the elements of the cost for each production order, whether finished or in the process of transformation. Different accounting for each task. The production is generally done on requests made by the clients, that is, the recipient of the goods or services is known before starting the production. It is adopted when each job can be clearly identified throughout all the processes. from the time the production order is issued until the production is concluded. It emphasizes the accumulation of real costs for specific orders. The production does not have a constant rhythm or is intermittent, so it can be suspended at any time,without affecting in any way the work being done. It allows to easily know the economic result of each job. You can know the cost of each job at any time, therefore simplifying the task of establishing the value of the Existence in processes.In each order, the costs for direct materials and labor that are systematically determined and identifiable with it are analyzed. At the end of the process, the indirect costs are prorated.The unit cost is determined when the complete manufacturing of the batch is finished and is calculated by dividing the total cost of the order by the number of finished units.The cost of each job can be known at any time, therefore the task of establishing the value of existence in processes is simplified. In each order, the costs for direct materials and labor are analyzed, which are systematically determined and which are identifiable with it. At the end of the process, the indirect costs are prorated.The unit cost is determined when the complete manufacturing of the batch is finished and is calculated by dividing the total cost of the order by the number of finished units.The cost of each job can be known at any time, therefore the task of establishing the value of existence in processes is simplified. In each order, the costs for direct materials and labor are analyzed, which are systematically determined and which are identifiable with it. At the end of the process, the indirect costs are prorated.The unit cost is determined when the complete manufacturing of the batch is finished and is calculated by dividing the total cost of the order by the number of finished units.Unit cost is determined when complete batch manufacturing is completed and is calculated by dividing the total order cost by the number of units completed.Unit cost is determined when complete batch manufacturing is completed and is calculated by dividing the total order cost by the number of units completed.
Process Costs
Process costing is a system that applies costs to similar products that are generally produced in large quantities and continuously through a series of production steps.
Process costing is a system of accumulating production costs by department, cost center or process, which are responsible for the costs incurred within their area and their supervisors must report the costs incurred to management, periodically preparing a report of the production cost.
The cost per process is applicable in that type of production that involves a continuous process and that results in a high volume of identical or almost identical production units. The articles produced demand similar processes and the raw material is transformed in stages until it reaches the degree of completion, generally it passes through several cost centers before it reaches the warehouse of finished products.
The cost accrual procedure follows the production flow, control accounts are established for each process, and direct manufacturing costs and overhead are allocated to each process. When the units are finished in a cost center, they are sent to the next cost center accompanied by their corresponding costs. The finished unit of one cost center is the raw material for the next until it becomes a finished item and is transferred to the finished product inventory.
The unit cost of the product is obtained by dividing the total cost of the processed products by the number of finished units. These unit costs are determined by departments in each period.
The Cost of Work Orders systems are used in organizations where production is of high mass, the production process is discontinuous for homogeneous products.
This system is applied more frequently in:
- Chemical products industry. Oil industry. Paper industry. Oil industry. Paint industry. Flour factories. Canning factories. Tobacco industry. Steel industry. Glass industry. Cement industry. Mining. Pulp industry. Sugar industry. Beverage and liquor factory. Fertilizer factory.
Among the characteristics of the process cost system, the following can be highlighted:
- Costs are accumulated and recorded by department, cost center, or process. Each department, cost center, or process has its own production in process account. This account is charged with the costs incurred in them. At the end of the period there are units in process with different degrees of determination. Units finished in a process and their corresponding costs are transferred to the next department or to the inventory of finished items. Total costs and units from each department are periodically added, analyzed and calculated through the use of production reports. (Textbooks)
Physical flows
The continuity in the productive process originates a constant physical movement of the units that enter the production and that require to receive the work of all the productive areas. To calculate the cost of production obtained at the end of each economic period, it is necessary to cut the movement to know the situation of each group of units. The determined situations are expressed in a report that includes everything that happened during a given period of time.
This report must show the magnitude of units available in each cost center for the performance of its work, which is made up of the physical stocks at the beginning of the reporting period and the receipts during that period. The destination given to available quantities that can be completed and departures, completed and non-departures and units that have not yet been completed should also be reflected in the report.
The unit movement report shows the physical movement of the different departments of an establishment, during a given period of time.
In a process cost system, units and costs flow together.
The following shows the equation for the physical flow of the units in the cost center.
Where:
- UIEP: Initial units in process EUP: Units that begin the process or are received from other departments UTA: Units transferred outside UTNT: Units completed and not transferred outside UFP: Final units in process
Production cost reports
The cost of production report allows you to perform an analysis of the activities of the cost centers over a period of time. The amount of detail that appears depends on the needs of the company or organization.
Generally it contains the following aspects:
- Quantities (input and output units). Equivalent production (units). Costs to be accounted for (entry cost). Accounted costs (production costs).
Quantities
In this aspect of the report, the physical flow of the units inside and outside the cost center is accounted for. That is, it counts the initial units in the process or those received from the previous cost center, the units transformed to the next cost center or finished items and the units in process at the end of the period.
Equivalent production
All the units are not finished during the period, as there are units that are still in process in the different phases of production. Therefore, all units must be expressed in terms of finished units to determine the unit cost. Equivalent output is the presentation of incomplete units in terms of units completed plus total units currently completed.
The total equivalent units of production for each cost element is found by adding the number of units completed with the equivalent units of work in progress.
Units in process are converted to equivalent units by multiplying units in process by the completion percentage.
The equivalent production units are then used in determining the unit cost.
Costs to account for
In this aspect of the production report it is indicated that costs were accumulated by the cost center. These may have been transferred to you during the period and / or added by the cost center during it.
Unit costs of direct materials equivalent equivalent direct labor and equivalent indirect costs are obtained by dividing the corresponding cost elect by the equivalent units. The sum of these equivalent unit costs results in the equivalent unit cost.
To determine the total equivalent unit cost of a cost center that receives productions from another cost center, the unit costs of that cost center are taken into account and the unit costs that are transferred from the cost centers where it comes from are added. the production.
Accounted costs
In this aspect of the production report, the distribution of accumulated costs is shown both for units still in process, and for units completed and not transferred to another cost center or finished items. The total costs to be accounted for must be equal to the costs accounted for.
Bibliography
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Mallo Rodríguez, C. (1991). Analytical accounting, costs, performance, prices and results. Spain, Ministry of Economy and Finance.
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