Cost accounting and management in Cuba

Overview of Cost Accounting and Management Accounting

Accounting is a science of an economic nature whose object is the past, present and future knowledge of economic reality in quantitative terms at all organizational levels, using specific methods based on sufficiently argued bases in order to prepare information that covers financial needs external and internal planning and control.

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. Therefore, there are two types of users with different information needs:

External users, who are those who are interested in the entity for financial or commercial reasons, but who do not participate in the development of its activity (shareholders, financial institutions, suppliers, official bodies, creditors, etc.). Internal users, who participate in the activity of the company and need accounting information for control and decision making.

Taking these aspects into account, that is, considering the destination of the company's economic and financial information, accounting is classified as:

Financial or General Accounting Cost Accounting

Financial or General Accounting deals with the classification, annotation and interpretation of economic transactions, with a view to preparing the Financial Statements, in charge of reflecting the economic and financial results of the company at the end of a period of operations. This information does not provide management with significant figures, such as the cost of the different products that the company manufactures, the profitability of each one, the efficiency in the use of labor, among others; that can be useful for decision making.

Cost Accounting provides managers with the information necessary to run Management Accounting. Both must exist, since a company can have excellent Cost Accounting, but if it does not study the future behavior of its expenses and costs and does not apply techniques to decide before, it does not have the required management accounting.

Cost Accounting deals with the classification, accumulation, control and allocation of costs. Costs are classified according to patterns of behavior, activities and processes. Costs can be accumulated by accounts, jobs, processes, products or business segments.

Cost Accounting enables:

Evaluate costs by product lines. Know the nature of each expense The area or cost center that has consumed the resources. Know if all the products or services have given benefits. Know if the costs correspond to what was projected, where and why they originated. Variations. Products or services that should be promoted or eliminated. Measure efficiency, etc.

Cost Accounting has evolved towards Cost Management, so it is necessary to explain the concepts, objectives and causes that manifest this behavior.

Management Accounting

Management Accounting is that discipline that captures, measures and values internal circulation, as well as its rationalization and control, to provide relevant information to the company for decision-making. For this it is necessary that the accounting system is permanently oriented both inside and around the organization. This information goes beyond cost and includes other key variables for business success, such as quality, flexibility, or time.

Management Accounting arises to face the new challenges of the market, among which are:

Increased competitiveness. The markets are saturated with products, which reduces the margin of freedom for companies that are conditioned by the behavior of companies that belong to the same sector, the growing instability of the business environment and greater uncertainty. The stability of previous decades has given way to greater turbulence, as markets are increasingly complex and dynamic. The internationalization and globalization of markets has removed national barriers, companies must be able to compete in a global market.Customers' demands. The expansion of markets makes customers reach a greater diversity of products from which they can choose. As a consequence, customers are increasingly demanding. Thus,Management Accounting systems should place more emphasis on obtaining information related to customers and not only to products. Technology development. The emergence of fully automated production systems makes overhead costs more important than the cost of personnel within the cost structure of companies. Information systems must evolve to reflect this new situation and to adequately report the tangible and intangible benefits of technology, not only in terms of cost savings. For example, the long-term effects of technological innovations must be measured, their impact on the flexibility of the production system, the training needs of personnel, their impact on culture, etc. The appearance of new production management techniques,for example, just-in-time production systems or flexible manufacturing, which try to minimize delivery time to customers. These systems are based on the existence of teams of multifunctional workers, rapid machine changes and new plant designs, organized by cells. The accounting system must adapt to new modes of production. For example, functional cost centers and exhaustive task control disappear as employees are responsible for their own self-control. The complexity and diversity of processes and products. The times are over when companies made a limited range of standardized products that they kept for a long period of time. Innovation and diversity are the dominant note today.Customers continually enter specifications into their orders. This distorts the calculation of costs and profitability of current systems. The existence of products with increasingly shorter life cycles. Accounting systems should adapt to the information needs in each phase of the life cycle. For example, during the phase of abandonment it is important to know the costs and the effects derived from the elimination of the product. In addition, the accounting system should give more importance to the product design phase, since in this phase the majority of the costs that will be incurred in the future are committed. The need to strengthen relationships with suppliers. For this, the accounting system must evaluate suppliers not only in terms of costs but, for example, based on quality,delivery terms and conditions, etc. It is necessary to carefully analyze the links or interrelationships between the activities in a given company and those of the suppliers, trying to find solutions that are advantageous for both parties.

The most outstanding characteristics of Management Accounting could be summarized as follows:

A global analysis of all the key variables for business success, expanding the scope of Cost Accounting to manage quality, time, flexibility or innovation, with greater emphasis on the short term but without losing given the long-term implications that decisions can have. A greater concern for the environment, and specifically for the behavior of competitors, customers and suppliers. The latter are considered more as allies willing to collaborate, a greater concern for having a vision of the organization as a whole. In other words, it aims to guarantee information that takes into account the interdependencies and the connections between the different functions. The search for partial results and the vertical vision of the company must be forgotten,to give way to the analysis of processes that flow horizontally. Its emphasis on achieving continuous improvement. For this, new management techniques are being introduced that are more oriented towards customers and value creation than towards cost reduction. In these techniques, personnel play a fundamental role and become a key part of the system.

Obviously, some accounting practices have become obsolete as a consequence of changes in the competitive environment, in the forms of production and in the cost structures of companies. This inadequacy is related to the criteria for the distribution of general costs (work units), the definition of the parameters that determine the variability of costs, the use of standard costs and the lack of a framework for action in accordance with business reality..

In cases where these methods have been inoperative, they have been replaced by a new approach to company management that focuses on the study of activities and, on the one hand, is used to improve product costing and services and on the other, it is a management tool with many possibilities to introduce improvements in efficiency.

The author highlights that in this Chapter some Cost Systems that have arisen as a result of the changes that have been explained in previous paragraphs will be discussed in detail and will then discuss some concepts and definitions to take into account in Cost Accounting in companies.

Diverse have been the concepts expressed on the term Cost. Below are some of the most important definitions:

"… are the means in the conventional accounting form, in monetary units, that must be paid to acquire goods and services." "… The cost represents a fraction of the purchase price of an item, property or service that has been deferred or that it has not yet been applied to the realization of income… ""… It is the value sacrificed to obtain goods or services. The sacrifice made is measured in dollars by reducing assets or increasing liabilities at the time benefits are realized. At the time of acquisition, the cost is incurred to obtain present or future benefits. When the benefits are obtained, the costs become expenses… ”

The author biases with the definition expressed by the author Polimeni since he points out important concepts such as costs, expenses and identifies them, which is important to know when carrying out any research on the subject of costs.

Fundamental Budgets of Business Activity:

Sales budget

The basis on which the sales budget and all other parts of the master budget rests is the sales forecast. The sales forecast provides the data to develop the production budgets, purchase budget, and sales and administration expense budget. If the sales forecast is wrong, the budgets that depend on it cannot be reliable.

Production budget

They should be closely related to sales budget and desired inventory levels. Before drawing up the production budget, it must be determined whether the factory can produce the quantities estimated in the sales budget; production must be planned at an efficient level, so that there are no major fluctuations.

Formula to determine the production schedule:

Budgeted production = Units required for sales + Final inventory of finished production - Initial inventory of finished production.

Direct materials purchase budget

The purchasing department prepares the purchase and delivery programs, which must be closely coordinated with the production budget and with the supplier delivery programs.

Formula to determine the budget for the purchase of raw materials:

Raw material purchase budget = (Raw materials required for production + Final inventory of raw materials - Initial inventory of raw materials) x Unit cost

Direct labor budget

The preparation of the direct labor budget implies the prior determination of the human resources necessary to face the production program. For this, once the quantity (measured in working hours) necessary to produce a unit of product is known, the total number of hours necessary to obtain the expected production can be obtained.

Indirect production cost budget

To achieve better control, expenses are separated into fixed and variables are separated; fixed expenses have assigned values, and variable expenses are assigned rates.

Knowledge of the level of activity is essential, above all in the budgeting process, when the flexible or variable budget must be estimated, which guarantees a consistent rate of application of indirect production costs.

The author emphasizes that indirect production costs depend on the level of activity carried out, which, in turn, is a direct function of the company's technical capacity.

Quote for items sold

The elements of this budget are taken from the individual budgets previously explained and adjusted for changes in inventory.

Sales Expense Budget

Selling expenses are made up of fixed and variable items. Variable items are assigned variable expense rates by item.

Administration budget

They must be classified in such a way that the individuals responsible for their incursion and control can be held responsible.

Research and Development Budget

Research is a permanent function and, as in other areas, it is possible to identify the factors involved in research programs and proceed to estimate the cost of each program.

Advertising Budget:

It consists of relating the advertising expenses.

Investment Budget

Estimate the necessary resources, as well as control over the distribution of funds destined for these purposes. The investments to be made will be made based on the technical, economic and commercial studies that allow selecting the optimal alternatives to achieve the established objectives.

Cost analysis

The cost analysis is fundamentally based on the evaluation of the behavior of expenses and their deviations; taking into account the place where they occur and the concept of each expense, so that the investigation of the causes that motivate them allows their knowledge and the taking of measures that are or at least lessen those that cause negative effects on the results. The analysis should be aimed at determining the causes of the deviations between the expense budget and its actual execution for the corresponding period, bearing in mind that the possibility of its elimination lies in the knowledge of the causes of negative deviations.

When carrying out the analysis, the most representative deviations should be highlighted, for example: in the case of materials used in excess of the standard, identify those that most affect the deviation and the causes of excess consumption, as well as which product or group of these correspond; in the salary, the behavior of the correlation average salary / productivity and in general, any variation that indicates excess labor or an insufficient productive response must be evaluated.

Documentation used for the Valuation of the Different constructive Actions that are executed.

Instruction No. 7/2005, Methodology of the Ministry of Finance and Prices, is used by the Technical Office for the formation of prices for the Projection, Engineering, Engineering Research Fees applied to Construction and other Technical Services, which are called Methodology, which regulates the maximum rates that may be applied and received by the legal entity called Executor, qualified and authorized by its corporate purpose and current registration license to provide Technical Projection Services, Engineering Research, applied to Construction and others provided in this Methodology named Technical Services.

The valuation procedures include the Technical Services independently or combined of any dimension, which may be requested from the Executor, as it is within its competence.

This methodology is based on the Guidelines of the Price Policy, the General Methodology for the formation of Prices and Rates, Joint Resolution No. 1 of 2005 of the Ministries of Finance and Prices and of Economy and Planning, in force.

It is also used by indications of the Executive Committee of the Council of Ministers, on the analysis for the Improvement of the Construction Price System, PreCons II, made available to all the Investors, Planners and Investors and Construction companies in the country; approved by Resolution No. 199/2005, of the Ministry of Finance and Prices, which is composed of the Instruction of:

Construction Price System The Regulations of the expenses sheet in convertible pesos The complementary Documentation.

In addition to PreCons II and Instruction 7 of the Ministry of Finance and Prices, there is a very specific Regulation of the Investment Process.

This Technical Documentation has, Objectives and Functions of the program, projection tasks, such as delivery and / or preparation of the Program / Projection task.

It establishes how a technical documentation must be processed, once the client requests the Service, including the formation of rates, according to the degree of protection and deterioration, that the constructive action has, as well as a Procedures Manual, where the Procedures, Definitions, Annexes, Requirements are established for the elaboration of the File of each Service that is requested by the client, by means of a contract signed by both parties by common agreement.

The contract includes among others the following Technical services:

- Technical Documentation - Architectural and photographic survey - Urban planning regulations - Projection and historical research task - Control of the author - Engineering research applied to Construction.

The value of each of the Technical Services is established as follows:

- For the Technical Documentation, the M² of surface intervened and the current price rate per M² are taken into account, the formula indicated by Instruction 7/2005 of the Ministry of Finance and Prices, in its 5th chapter, is applied to this result. to obtain the value of the total technical service. - For the rest of the Technical Services, the Hourly Rates Procedure is used.

Assessment of Technical Construction Services.

The following describes briefly the Construction Price System applied by the OCC Technical Office to calculate the value of the Technical services they provide.

The value of the Technical Documentation Service is determined from the following two steps:

Calculation of the amount of the multiplication of the M² to intervene in the work executed by the rate (Current Price) applied according to the type of Construction Action and the degree of deterioration it presents. This result is called "Investment Budgetary Value" agreed between the Parties "whose acronym Vı in the formula of the next step. Calculation of the value of the service by using the following formula:
- Vp = Cpg. Saw. TP (KA) 100 The Σ is not carried because it is to calculate only the value of the Technical Documentation Service.
  - Vp: Value of the total service and / or of the (s).Cpg: Coefficient of the activity of the General Planner. Vi: Value [budgetary of the Investment agreed between the parties. PT: percentage rate. K: Coefficient that is determined by the stage or stages to be considered A: Coefficient or applicable adjustment value.
The value of the remaining Technical services are determined by applying the hourly rates, as explained in Chapter I.