According to Horngren, Foster and Datar (2014), within the framework of the International Financial Reporting Standards (IFRS), business cost accounting is a process that includes the recognition and measurement of costs, as well as the recording of these costs in accounting books and the presentation of the information of the costs in the financial statements of companies.
Cost accounting is the system that allows obtaining information for business decision-making.
Without accounting cost information, direct raw material, direct labor, and manufacturing overhead costs are not available. Knowing the value of the cost of production is essential to continue producing, to form prices, to sell, to gain competitiveness in the market. Likewise, cost accounting is an information system to predetermine, register, accumulate, distribute, control, analyze, interpret and report the costs of the company, its distribution, administration and financing. Cost accounting should be considered both a service activity and an information system and a descriptive and analytical discipline that values, records and presents the costs and expenses of the company.
The company's cost accounting must contain the following four bases: 1) the economic nature of the information; 2) measurement and communication; 3) areas of the company; 4) people interested in making judgments based on information and making decisions using that information.
Graphic No. 1 (View PDF)
Source: HORNGREN Charles T., Foster George, and Datar Srikani (2014) Cost Accounting - A Management Approach. Mexico. Prentice May Hispanoamericana SA
Cost accounting also refers more directly to information prepared and presented for use by people who, internally in the entity, must make decisions day after day regarding its administration (directors, managers, administrators, officials, etc.). Cost accounting is a technique used to systematically and structured produce quantitative information expressed in monetary units of the cost and expense transactions carried out by the company and of certain identifiable economic events that affect it, in order to facilitate management making decisions in relation to said economic entity.
According to the American Accounting Association (AAA), referred by Dutilli (2014), business cost accounting is essential to have information for business decision making about sales, costs, expenses, investments, debts and more. This type of accounting provides information on cost of production, cost of distribution, and total cost. If it were the cost per activities, cost accounting is also there, giving information on the cost of each business activity. Cost accounting is a process of identifying, measuring, and communicating economic information that enables judgments to be made based on the information and decision-making by those who use the information. Identification refers to the documents that contain the transactions. The measurement refers to the valuation, that is, the value of a transaction,the same that may be contained in several identified documents. Communication is the way in which data is transmitted from one area to another and from there, it allows knowing, understanding and applying said information in the most appropriate decisions; how to increase costs, reduce costs, maintain costs; sell more, negotiate costs, etc.
The cost accounting has as its starting and ending basis the inventories of an area or of the entire company, these inventories constitute the items of current assets that are ready for sale or corresponding use. The merchandise, raw materials or supplies that a company has in the warehouse is valued at the acquisition cost plus the expenses related to said acquisition. The internal control of inventories begins with the establishment of a purchasing department, which must manage the purchases of inventories following the purchasing process. There are several methods to carry inventory management and control, which are: First entries, first exits; average, specific identification, basic stocks and retail inventory.Among the internal control measures with the inventory are the following: Periodically do physical counts; Confront physical inventories with accounting records; Protect inventories in a covered warehouse with doors so that thefts are avoided; Deliver merchandise only with authorized requisitions; Protect inventories with an insurance policy;. Make random checks to compare with ledgers.Do random checks to compare with the ledgers.Do random checks to compare with the ledgers.
According to Giraldo (2014), business cost accounting more than for shareholders, customers, suppliers and creditors, is for management to make optimal business decisions; more information better decisions; less information less adequate decisions. This type of accounting provides abundant information that management can use as raw material for the decisions that must be made. Cost accounting is the discipline that allows determining fixed costs, variable costs, mixed costs, contribution margin, break-even point and provides all the information necessary for planning, decision-making and control of the company. The data that the cost accounting currently shows are generally taken as the basis for preparing projected financial statements.and they also serve as support for the calculation of standard cost variations aimed at measuring the performance of some of the departments of a company.
Cost accounting relates to cost information for internal use by company management and greatly assists management in formulating objectives and operating programs in comparing actual and expected performance and in presenting from reports.
The directors, the management and the administrative department constantly face different situations that directly affect the operation of the company, the information they obtain about the costs and expenses incurred by the organization to carry out its activity and that governs its behavior, are of vital importance for making decisions in a fast and effective way, this makes that nowadays «Cost accounting» takes great relevance to the needs of information users.
The cost of the company is defined as the value sacrificed to provide services by reducing the acquisition value of the inputs; direct labor and indirect costs for the provision of services. The information required by the company can be found in the set of daily operations, expressed in a clear way in cost accounting, from which the evaluation of administrative and managerial management emerges, becoming a fundamental tool for the consolidation of entities. To provide understandable, useful, and comparable information, it must be based on past income and costs needed for product costing, as well as projected income and costs for decision-making.The data that users need can be found in a "Pool" of cost information and can be classified into different categories according to: The elements of a product; The relationship with production; The relationship with volume; The ability to associate them; The department where they were incurred; The activities carried out; The period in which the costs will be charged to the income; The relationship with planning, control and decision making.
1.1. BASIC ELEMENTS OF BUSINESS COST ACCOUNTING
According to Polimeni; Fabozzi and Adelberg (2014), business cost accounting is formed on the recognition and measurement of the basic elements of the cost of elements that the company needs. The cost elements of a product or its components are direct materials, direct labor and indirect manufacturing costs, this classification provides the necessary information for the measurement of income and the pricing of the product. Below is the detail of the elements of business costs:
MATERIALS: They are the main resources used in production; These are transformed into finished goods with the help of labor and manufacturing overhead. They can be i) Direct: They are all those that can be identified in the manufacture of a finished product, are easily associated with it and represent the main cost of materials in the elaboration of a product; ii) Indirect: They are those who are involved in the elaboration of a product, but have a relative relevance compared to the direct ones.
LABOR: It is the physical or mental effort used for the elaboration of a product: It can be i) Direct: It is the one directly involved in the manufacture of a finished product that can be associated with it easily and that has a great cost in the elaboration; ii) Indirect: It is one that does not have a significant cost at the time of product production
INDIRECT MANUFACTURING COSTS (CIF): They are all those costs that accumulate from indirect materials and labor plus all those incurred in production but that at the time of obtaining the cost of the finished product are not easily identifiable directly with the same.
1.2. GENERAL CLASSIFICATION OF BUSINESS COSTS
According to Polimeni; Fabozzi and Adelberg (2014), the costs of the companies can be classified attending to different aspects, such as:
COSTS IN RELATION TO PRODUCTION: This is closely related to the cost elements of a product and the main objectives of planning and control. The two categories, based on their relationship with production are:
RAW COSTS: They are all direct materials and direct production labor. Prime cost = MD + MOD
CONVERSION COSTS: These are related to the transformation of direct materials into finished products, that is, direct labor and indirect manufacturing costs. Conversion cost = MOD + CIF
THE COSTS IN RELATION TO THE VOLUME: The costs vary according to the changes in the production volume, this is framed in almost all the aspects of the costing of a product, these are classified in:
VARIABLE COSTS: They are those in which the total cost changes in direct proportion to the changes in volume, while the unit cost remains constant.
FIXED COSTS: They are those in which the total fixed cost remains constant while the unit fixed cost varies with production.
MIXED COSTS: These have the characteristic of being fixed and variable, there are two types:
SEMIVARIABLES: The fixed part of the semi-variable cost represents a minimum charge, with the variable part acquiring a greater weight within the cost of the product.
STAGED: The part of the staggered costs changes to different production levels since these are acquired entirely by volume. From the relationship between cost and volume of production, it can be said that: 1. Variable costs change in proportion to volume. 2. Variable unit costs remain constant when volume is changed. 3. Total fixed costs remain constant when volume is varied. 4. Fixed costs per unit increase when volume decreases and vice versa. Information about the various types of costs and their behavior patterns is vital for managers' decision making.
COSTS IN RELATION TO THE ABILITY TO ASSOCIATE COSTS:
A cost can be considered direct or indirect depending on the ability of management to associate it specifically with orders or departments, they are classified as:
DIRECT COSTS: Are those that management is able to associate with specific items or areas. Materials and direct workmanship are the clearest examples.
INDIRECT COSTS: They are those common to many articles and therefore are not directly associated with any article or area. Indirect costs are usually charged to items or areas based on allocation techniques.
COSTS ACCORDING TO THE DEPARTMENT WHERE THEY WERE INCURRED: A department is the main functional division of a company. Department costing helps management control indirect costs and measure revenue. The following types of departments are found in manufacturing companies:
PRODUCTION DEPARTMENTS: These contribute directly to the production of an item and include the departments where the conversion or manufacturing processes take place. Includes manual and mechanical operations performed directly on the product.
DEPARTMENTS OF SERVICES: They are those that are not directly related to the production of an article. Its function is to provide services to other departments. The costs of these departments are generally allocated to the production departments.
THE COSTS ACCORDING TO THE ACTIVITIES CARRIED OUT:
The costs classified by function are accumulated according to the activity carried out. According to the activity, the costs are divided into:
MANUFACTURING COSTS: These are related to the production of an article. Manufacturing costs are the sum of direct materials, direct labor, and manufacturing overhead.
MARKETING COSTS: They are incurred in the promotion and sale of a product or service.
ADMINISTRATIVE COSTS: They are incurred in the direction, control and operation of a company and include the payment of wages to management and staff.
FINANCIAL COSTS: These are related to obtaining funds for the operation of the company. They include the cost of interest that the company must pay on the loans, as well as the cost of granting credit to clients.
THE COSTS ACCORDING TO THE PERIOD IN WHICH THE INCOME IS CHARGED
In this case, some costs are first recorded as assets (Capital expense) and then deducted (Charged as an expense) as they expire. Other costs are initially recorded as expenses (Operating expenses).
Classifying costs into categories with respect to the periods they benefit, helps management in measuring income, preparing financial statements, and associating expenses with income in the appropriate period. It's divided in:
PRODUCT COSTS: They are those that are identified directly and indirectly with the product. These costs do not provide any benefits until the product is sold and therefore would be invented until the end of the product. When products are sold, their total costs are recorded as an expense called the cost of goods sold.
PERIOD COSTS: These are not directly or indirectly related to the product. Period costs are canceled immediately, since no relationship between cost and income can be determined.
COSTS IN RELATION TO PLANNING, CONTROL AND DECISION MAKING
These costs help management and administrators in planning, control and decision-making functions. These costs include: standard costs and budgeted costs; controllable and uncontrollable costs; committed fixed costs and discretionary fixed costs; relevant costs and irrelevant costs; differential costs; opportunity costs; plant closing costs
1.3. BUSINESS COST SYSTEMS AND THEIR ACCOUNTING
According to Ramos (2014), the cost systems are a set of methods, rules and procedures that govern the planning, determination and analysis of the cost, as well as the process of recording the expenses of one or several productive activities in a company, in an interrelated way with the subsystems that guarantee the control of production and / or services and material, labor and financial resources. Among the objectives of a cost system are: Establish guidelines to which the procedures for assigning costs are submitted; Determine the criteria to apply in the distribution and apportionment of expenses; To establish the opportunity or date in which the costs must be calculated, the calculation methods, the bases that can be used, how certain costs have to be treated, how to determine the total and unit costsas well as the methodology for cost budgeting and standard setting. In order to calculate the cost of the units produced or the service provided, it is necessary to define a system to apply them to the activity. In general, two Cost Accounting systems can be applied according to their concentration: Cost per Process System; ü Cost System for Work Orders.
PROCESS COSTS SYSTEM:
According to Giraldo (2014), the process cost system, is applied in companies or in continuous or mass processing industries, where equal units are produced subject to the same production processes. It constitutes an average cost, where each physical unit of production is assigned an aliquot of the whole that represents the cost of production. It is used when products are made using high-volume production techniques (continuous processing). Process costing is adequate when producing homogeneous items in large volumes as well as in oil refineries, in a sugar factory, or in a steel factory. Under a cost per process system, the three basic elements of the cost of a product (direct materials,direct labor and indirect manufacturing costs) accrue according to departments or cost centers.
Graphic No. 2 (See PDF)
Source: GIRALDO JARA, Demetrio (2005) Cost accounting. Lima Peru. Editing by the author.
COST SYSTEM FOR WORK ORDERS:
According to Salazar (2014), the work order cost system, is the set of principles and procedures for recording the expenses identified with specific production orders, which allows finding a unit cost for each order and determining the different cost levels in relation to total production, in companies where production is done by order. A work order cost accumulation system is more suitable where a single product or a group of products are made according to the specifications of the clients, that is, each job is made to order. Under a Work Order Cost System, the three basic elements of a product's cost, that is, direct materials, direct labor, and indirect production costs, are accumulated according to their identification with each order.In this system, the incorporation of expenses into the order is carried out taking into account the Cost Sheet, the main document in the system, and one will be issued for each work order that has been sent to the production workshops. This cost sheet starts from when the job is executed, and is the auxiliary book of the Production in Process account and is filled out in detail and filed upon completion of work orders. To add the direct materials to this cost sheet, there is a primary document called the Delivery or Return Voucher, which will reflect the order number for which it is assigned and accounting on your part proceeds to record the consumption of the materials of each order in the Production in Process account. Regarding direct labor,This is determined according to the summary of time and work where the hours worked by the workers in each order are detailed, which will allow identifying the cost for direct salary incurred in the orders and reflected in the Production in Process account. Other expenses that are not identified with an order and are considered indirect, to the extent they are incurred, are recorded in the Indirect Manufacturing Costs account. For its apportionment between orders, it is convenient to determine an application rate which can be Real or Default. If the application rate is Real part of the historical data using the Real Costing Method and if the application rate is predetermined, the data from the budget are taken, using the Normal Costing Method.The application rate is calculated by dividing the total manufacturing indirect costs by the total of a base, which can be the direct material expense, direct labor hours, machine hours, production units and labor cost. direct. Once the production order is concluded, it will be transferred to the finished production warehouse and accounting will proceed to post said production in the Finished Production account, for subsequent sale to the customer. Already invoiced and held by the client, the cost of sale is registered. Selling and administrative expenses are not considered part of the production cost of the work order and are shown separately in the income statement. A work order cost accrual scheme is shown below for better understanding.
Graphic No. 3 ACCUMULATION OF COSTS FOR WORK ORDERS (See PDF)
Legend: PP: Production in Process; PT: Finished Production; CV: Cost of Sale.
Source: GIRALDO JARA, Demetrio (2014) Cost accounting. Lima Peru. Editing by the author.
FIXED AND VARIABLE COSTS:
According to Giraldo (2014)Fixed costs are those that have to be paid regardless of whether the company produces more or less products, for example there are leases, which although the company is active or not, must be paid, even if it produces 100 or 500 units, it should always pay the same value for the lease. On the other hand, variable costs are those that are paid according to the volume of production, such as labor (if production is low, few employees are hired, if they increase because more will be hired and if it decreases, they will be fired), We also have the raw material, which will be purchased according to the quantity that is being produced. In a company it is advisable to control and decrease fixed costs, since these economically affect the company, if it is in a recession stage, such fixed costs will cause loss,in such a way that the less fixed costs a company has, the better the expense-income ratio it will have. The management of variable costs makes the company much more adaptable to the changing circumstances of the market, of the offer. They can be defined as a segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say that only the variable costs are those that must form part of the cost.They can be defined as a segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say that only the variable costs are those that must form part of the cost.They can be defined as a segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say that only the variable costs are those that must form part of the cost.
Fixed costs should be considered as results of the period in which they are incurred. Fixed costs; Movements in these costs can also occur in such a way that they increase, the company has to make an additional effort to cover them. When the increase in these costs occurs, the break-even point increases but affects the company. They are those committed, programmed or planned costs that are incurred to provide and maintain the production and sale capacity of the company. This cost in a given period of time and the duration of the activity, this cost is called "relevant duration" does not change in total, but becomes progressively smaller on a per unit basis as the volume grows and will be progressively of greater amount in relation to the unit,if the aforementioned activities decrease.
In other words, these costs are fixed in relation to their amount in money and variable costs in relation to the unit from which it can be deduced that the fixed costs are a consequence of the long-term decisions of management. In cost-utility relationships and in the effect of patterns on the behavior of costs on decision-making, it is useful for precisely making administrative decisions. The cost-utility-volume analysis determines the volume to be set as the objective, that is, the volume necessary to achieve the desired operating income. One of the most widely used forms in the cost-volume-profit analysis is the calculation of the equilibrium point of a company.
For companies that are not subject to price controls, it is very interesting to see their different options, and their impact on demand and, therefore, their effect on company profits. The basis on which prices are reduced is always larger than the basis for increasing variable costs; it is valid if it is the same percentage of reduction and increase. They are those costs that vary proportionally, according to the level of production or activity of the company. Are the costs for "producing" or
"to sell". For example: direct labor (piecework, by production or therefore), direct raw materials; Materials and direct supplies; Specific taxes; Containers, Packaging and labels; Sales commissions. This analysis is very simple to perform: any increase in volume above the current breakeven point represents an increase in profits, and any decrease in volume results in a decrease in profits. By analyzing the different variables, it is determined how important it is to simulate different actions with respect to prices, volume or costs, in order to increase profits. This can be achieved by comparing what is budgeted with what is currently happening, and thus carry out different strategies for each of the variables.
According to Santa Cruz (2014), the contribution margin is the difference between the sale price less variable costs. It is also considered as the excess of income with respect to variable costs, an excess that must cover fixed costs and profit or profit. The contribution margin per unit can be determined only for a particular product mix. If the actual mix of products sold differs from the mix of products used in the analysis, there will be a divergence between expected profit, based on the cost-volume-profit model, and realized profit. Furthermore, the break-even point will not be the same if the mix of products actually sold differs from the mix of products used in the analysis.The unit contribution margin (MCU) equals all sales revenue less all costs that vary with respect to a cost factor related to production. The equilibrium point can be calculated in monetary units or physical units, as we will see in the solution of the different exercises. The calculation in monetary units is recommended when the activity is not recognizable in units or when there are several goods or products. Here the "product mix", that is to say, the proportion in which the different products are sold, intervenes a lot and this mixture must be kept constant in reality, so that the calculated equilibrium point coincides with the real thing. In the preceding exercises we will calculate individual equilibrium points, when there are several products.In case of calculating the equilibrium point in money, we have the following expression:
TOTAL REVENUE = Fixed costs + total variable costs
We assume that the unit variable costs are proportional to the sale price, then, so will the total variable costs and the total income. In other words, we must maintain that proportion, therefore, we can write the last expression in the following way:
According to Hernández (2014)Fixed costs are those costs that the company must pay regardless of its level of operation, that is, whether it produces or does not produce, it must pay. A fixed cost is a cost that the company must necessarily incur, even if the company operates in mid-gear, or does not, which is why they are so important in the financial structure of any company. This is the case for example of payments such as leasing, since this, even if nothing is sold, you have to pay it. It also happens with almost all labor payments, public services, insurance, etc. Perhaps the main component of fixed costs is labor, therefore, it is not surprising that companies fight for greater labor flexibility every day, allowing them to convert these fixed costs into variables.And it is that fixed costs represent a real problem for companies, especially when for some reason, their income or productivity decreases, since in any case, they will have to continue assuming fixed costs, and nobody is amused that while income falls costs don't.
For this reason, companies do everything possible to reduce the proportion of fixed costs, since this allows them to better adapt to operating ups and downs.
When the fixed costs are high, in a low productive period the company can present losses, something that can be avoided if the fixed costs could be decreased as production decreases, a property that variable costs have. The ideal for a company would be that its costs were a function of the income produced, that is, that they only had variable costs, something that is impossible, although it is possible to work with a minimum of fixed costs, and that should be the objective of a good cost management.
Variable costs refer to production costs that vary depending on the level of production. Any cost that increases or decreases as production increases or decreases is known as variable cost. A clear example of variable cost is the raw material, since the more units produced of a given good, the more raw material is required, or otherwise, the fewer units are produced, the less raw material is required. The same happens with containers, since their quantity depends directly on the quantities of goods produced.
The variable cost is important, since it allows to maximize the resources of the company, since this will only require the costs that the production strictly requires, according to its level.
The production costs of a company will be more efficient the higher the percentage of variable costs. A company that hypothetically had a 100% variable cost, means that if it does not produce anything in a month, it will have zero cost, but if its variable costs were 50%, in a month that nothing is produced, in which no income is obtained, even so it will have to run with a high fixed cost.
ACTIVITY BASED COSTS:
Analyzing Apaza (2014), activity-based costs (ABC) have meant nothing more than a return to the origins of cost accounting. This assertion is based on the fact that Cost Accounting was born scientifically, together with the Industrial revolution and as a consequence of the fact that production began to develop within the same premises and under the direct supervision of the entrepreneur. The necessity of the entrepreneur to know the performance in the different tasks that he carried out to manufacture the products, made that, in its beginnings, the Cost Accounting was directed mainly to know the activities that were developed in the organization.The increasing complexity of the production processes and the lack of technical and computer resources were the factors that caused Cost Accounting to worry less and less about the activities at the core of cost calculation and more about the different parts of the organization. at the head of which were appearing responsible for management. Thus justifying the traditional rise in costs by Departments.
The ABC (acronym in English for "Activity Based Costing" or "Activity-Based Costing") was developed as a practical tool to solve a problem that is presented to most companies today. Traditional cost accounting systems were developed primarily to fulfill the function of inventory valuation (to satisfy "objectivity, verifiability, and materiality" standards), for external incidents such as creditors and investors. However, these traditional systems have many shortcomings, especially when used for internal management purposes.
Two especially important flaws are: 1. The ability to report the costs of individual products at a reasonable level of accuracy. 2. The ability to provide useful feedback for the administration of the company for the purposes of operations control. Consequently, managers of companies that sell a variety of products make important decisions about pricing, product composition, and process technology based on inaccurate and inadequate cost information.
According to Leturia (2014)Traditional cost systems base the process of "costing" on the product or service, because it is estimated that the product consumes direct and indirect, or fixed and variable costs. In this sense, it is estimated that the costs are remitted to the product because it is assumed that each element of the product consumes the resources in proportion to the volume produced. Therefore, product volume attributes, such as the number of direct labor hours, machine hours, amount invested in materials, are used as "routers" to allocate indirect costs. These volume routers, however, do not account for product diversity in the form of size or complexity. Nor is there a direct relationship between production volume and cost consumption. In contrast to this,The ABC costing model is a model that is based on the grouping into cost centers that make up a value sequence of the products and services of the company's productive activity. It focuses its efforts on managerial reasoning in an appropriate way the activities that cause costs and that are related through their consumption to the cost of the products. The most important thing is to know the generation of costs to obtain the greatest possible benefit from them, minimizing all the factors that do not add value. The activities are related in sets that form the total of the productive processes, which are ordered sequentially and simultaneously, in order to obtain the different cost statements that accumulate in production and the value that they add to each process.The processes are defined as "The entire rational organization of facilities, machinery, labor, raw materials, energy and procedures to achieve the final result." In the studies carried out on ABC, the activities and processes are separated or described, the most common are listed below:Activities: Homologate products; Negotiate prices; Classify providers; Receive materials; Plan production; Issue orders; Check in; Charge; Design new products, etc. Processes: Purchases; Sales; Finance; Personal; Planning; Research and development, etc. The activities and processes to be operational from the point of view of efficiency need to be homogeneous to measure them in the operational functions of the products.
According to Ledesma (2014)The activity costing system establishes that the costs are consumed by the activities carried out by the company. Thus, the identification of all the activities of the company is essential to determine the costs that these activities consume. In the identification process within the ABC model, activities must first be appropriately located in the productive processes that add value, so that when operations begin, the organization has the ability to respond efficiently and effectively to the demands that the market imposes on it. After the activities in the company have been specified and grouped into the appropriate processes, it is necessary to establish the units of work,the cost transmitters and the transformation ratio of the factors to thereby measure the productivity of the inputs and to rationally transmit the cost of the inputs over the cost of the outputs.
A study of the sequence of activities and processes, together with their associated costs, can offer the organization's managers an overview of the critical points of the value chain, as well as the relative information to carry out continuous improvement that can be applied in the value-creating process. Knowing the causal factors that drive the activities, it is easy to apply the efficiency inducers, which are those factors that decisively influence the improvement of some efficiency attribute of the activity, whose refinement will help to complete the harmony of the productive combination. These inductors tend to focus on improving the quality or characteristics of the processes and products, reducing deadlines, improving the critical path of core activities, and reducing costs.
Finally, it is necessary to establish a system of control indicators that continuously show how the activities and processes work and the progress of the efficiency inducers. This control consists of comparing the real state of the action against the proposed objective, establishing the appropriate correctors to take them to the proposed value chain. Conventional economic theory and management accounting systems treat costs as a variable only if they change with short-term fluctuations in production. ABC's theory holds that many important cost categories do not vary with changes in production in the short term, but with changes (over several years) in the design, composition, and variety of the company's products and customers.These complexity costs must be identified and assigned to the products.
According to Ampuero (2014), activity costing or ABC costing, is a valuable system that directs an organization's costs to products and services. These organizations use ABC as a method of improving operations by managing inducers of cost-generating activities, to support better decisions about product lines, market segments, and customer relationships, simulating the impact of improving the processes (Total Quality Management) using the financial and non-financial intermission of the ABC as a measurement system.
ABC costing provides a global appreciation of the design and implementation process of an ABC system. If the organization is large or small, manufacturing or service, the main outline can be used to develop an effective cost system. This assumes that you are familiar with the basic concepts of ABC. An understanding of the responsibilities and roles of accounting managers in the ABC project helps convince the organization of the need to overhaul the system, to provide a better understanding of product or service costs, business processes, and activities as a more comprehensive means of business decision making.The ABC (Activity Based Costing) method analyzes the activities of the indirect (support) departments within the organization to calculate the cost of finished products. And it analyzes the activities because it recognizes two simple but evident truths: 1. It is not the products but the activities that cause the costs; 2. It is the products that consume the activities. The ABC method consists of allocating manufacturing overhead to products by following the steps outlined below: 1. Identifying and analyzing separately the different support activities that indirect departments provide. two.Assigning to each activity the costs that correspond to them, thus creating homogeneous cost groups in the sense that the behavior of all the costs of each group is explained by the same activity. 3. Since all the activities have been identified and their respective costs grouped, then the "activity measures" must be found that best explain the origin and variation of manufacturing overhead. They are competitive measures that serve as a connection between activities and their respective manufacturing overhead, and can also relate to the finished product. Each "measure of activity" must be defined in perfectly identifiable units of activity.then the "activity measures" must be found that best explain the origin and variation of manufacturing overhead. They are competitive measures that serve as a connection between activities and their respective manufacturing overhead, and can also relate to the finished product. Each "measure of activity" must be defined in perfectly identifiable units of activity.then the "activity measures" must be found that best explain the origin and variation of manufacturing overhead. They are competitive measures that serve as a connection between activities and their respective manufacturing overhead, and can also relate to the finished product. Each "measure of activity" must be defined in perfectly identifiable units of activity.
The measures of activity are known as "COST DRIVERS", a term whose approximate translation in Spanish would be "origin of cost" because it is precisely the "cost drivers" that cause manufacturing overhead to vary; that is, the more units of activity of the specific cost driver identified for a given activity are consumed, then the higher the indirect costs associated with that activity. As an example of cost drivers can be mentioned ». Number of providers: a. Number of production orders made; b. Number of material deliveries made. In this way, a higher cost is assigned to those products that have demanded more organizational resources,and there will no longer be distortions in the cost of products caused by the averaging effects of a traditional cost allocation system that fails to study the true causes of the behavior of manufacturing indirect costs and, therefore, prorates them using bases arbitrary allocation such as direct labor hours. The traditional system did not identify, study, or analyze the root causes of origin and variations in manufacturing overhead. The ABC method holds that each line of manufacturing overhead is tied to a specific type of activity and is therefore explained by a different 'Measure of Activity'. In other words,What explains the behavior of the costs of indirect departments (considered most of them as fixed according to traditional accounting thinking), are the different transactions or activities that the finished products consume in their elaboration.
According to Neuner (2014), the objective of the ABC method; is to make senior management and the entire organization aware of the important role that indirect departments play in the production process and how the manufacturing overhead incurred in these departments contributes to the success of any company. ABC systems cannot be successfully implemented without full support from accounting managers who have the right background to approach the ABC system from its inception. His vision contributes to the identification of the appropriate units of analysis (product, processes, etc.) and the probable causes of failure of the cost system.
In the ABC project, accounting managers have the information to judge the level of detail that the system should study and the best understanding of the flow of costs through the organization and the ability to detail the necessary flow of information to support the system when is implemented. Accounting managers must lead the ABC project towards its successful implementation through their enthusiasm, technical knowledge, conceptual understanding, creativity, innovation, persistence, ability to overcome reality and remove obstacles.
For Sánchez (2013)There are three primary sources of information necessary for the development of an ABC system: people, balance, and the organization's computer system.
- The people who do the work are the main source of information. They provide data about the organization's activities, resource consumption, and performance measurements used. The balance provides information about the elements of the cost of the organization and the outputs made. The organization's systems should contain information about cost objects and cost drivers. For example, the number of canceled invoices (a potential cost driver) should be obtained through the payment of system bills. One of the most important advantages derived from an activity-based management system is that it does not directly affect the functional organizational structure since ABC manages the activities and these are arranged horizontally throughout the organization.This is precisely the advantage that changes in the organization are not reflected in the system. It helps to understand the behavior of the costs of the organization and, on the other hand, it is a management tool that allows financial projections to be made since it simply must report the increase or decrease in activity levels. 3. The ABC perspective provides us with information about the causes that generate the activity and the analysis of how the tasks are carried out. An exact knowledge of the origin of the cost allows us to attack it from its roots. 4. It allows us to have a real vision (horizontally) of what is happening in the company.Without a horizontal vision (without knowing the participation of other departments in the process that is executed) we really lose the vision of the need for our work for the client to whom we must justify the price that we invoice. 5. This new management system will allow us to find out useful non-financial measures for decision-making. Once this system has been implemented, the ABC will provide us with a quantity of information that will reduce the costs of special studies that some departments have to support or complement. to the traditional cost system. So the effect is twofold, on the one hand it increases the level of information and on the other hand it reduces the costs of the cost department itselfThis new management system will allow us to know non-financial measures that are very useful for decision-making. Once this system is implemented, the ABC will provide us with a quantity of information that will reduce the costs of special studies that some departments support or complement the system. traditional cost. So the effect is twofold, on the one hand it increases the level of information and on the other hand it reduces the costs of the cost department itselfThis new management system will allow us to know non-financial measures that are very useful for decision-making. Once this system is implemented, the ABC will provide us with a quantity of information that will reduce the costs of special studies that some departments support or complement the system. traditional cost. So the effect is twofold, on the one hand it increases the level of information and on the other hand it reduces the costs of the cost department itselfon the one hand it increases the level of information and on the other hand it reduces the costs of the cost department itselfon the one hand it increases the level of information and on the other hand it reduces the costs of the cost department itself
The difficult thing about a system is that it is simple and transparent and the ABC is because it is based on real events and is totally subjective in such a way that it cannot be manipulated in any way given that it is based on activities
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