Emergence and evolution of Cost Accounting.
Cost Accounting, analytical or managerial, has its origins from very remote times since from ancient Mesopotamia, 4500 years old accounting documents appeared with determinations of the costs of salaries and inventory inventories.
farm-henequenera-beloved-cuellar-abc-1This evolution had a chronological sequence in time until reaching the union organization as the socioeconomic base of production in the Middle Ages.
At the time of the guilds, there was a greater development in industry and commerce that allowed to control production costs for each manufacturing process, accumulating the costs of materials and labor.
It is with the invention of the Gutenberg printing press that the accounting records and books are perfected, as well as the first manufacturing order cost systems. From these advances, the interrelation between General or Financial Accounting and Cost or Management Accounting is appreciated.
The pace of accounting development increased with the Industrial Revolution, the success of which was produced fundamentally by the technological progress achieved and the expansion of production capacity, applying the principle of specialization of labor on a large scale, which led to a considerable reduction in unit cost of products. In this period, however, it is not possible to speak of a finished or totally improved cost accounting, since, initially, direct costs (direct material and labor), constituted the majority of the total cost of the product, not requiring special Complications in the calculation of product costs, since the problem of the distribution of indirect costs was not prioritized.
In the period between the last two decades of the 19th century until the First World War, it was considered as a superior stage of industrial capitalism and where technological and business advancement became stronger, the distribution of indirect costs based on historical, which was the most developed of Cost Accounting so far.
After the First World War, a great commercial boom began due to the conquest of new markets, which originated a process of concentration of companies, as well as the increasing diversification of products within the large industrial sectors, giving rise to a greater demand. Cost Accounting in order to achieve greater accuracy in production costs. Faced with this situation, cost systems arose that aggregate and homogenize the indirect consumption required in the section accounts.
Logically, with the passage of time, new critics appear regarding the distributions and imputations of indirect costs, thus promoting the Direct Costing model in the 30s of the 20th century, whose objective was to avoid the deviations caused by the apportionment of indirect costs with respect to the product; proposing with this model that only direct costs, plus variable indirect costs, were attributed to the product.
In these moments in which development does not stop and the advancement of technology is dizzying, specialists constantly study different approaches to respond to the development of decision-making with a vision more in line with the development of the market and industry. The methods will respond to these market demands are: cost based on activities, cost based on sub-activities, cost per objective, among others, which are combined with other techniques such as: ABM (Activity Based Management or activity based management)) and goal-based management or the Just in Time technique.
Undoubtedly, the evolution of Cost Accounting can be seen as continuously increasing, defining the advantages and disadvantages of one method with respect to another, a question that will be discussed below. 2. Comparison of conventional cost methods with activity-based cost.
Traditional systems, in principle, were focused on environments in which the decision-making process was not excessively complex and the organization of production required coordinating specific and repetitive tasks in a more or less stable environment, where products used to achieve their maturity stage.
This section reflects on the different methods and systems that have evolved throughout the history of Cost Accounting. For this, it will start with the real or historical cost.
As its name implies, those costs that have happened in the past and for which its calculation is useful to know the value of a product or service produced or generated in the company and, therefore, to evaluate past actions in the entity.
Traditional cost methods.
The cost systems are methods that can be used to know the costs of the different cost objectives (products, activities, cost centers) and determine the result of the period. The cost system that a company chooses depends on variables among which the following stand out:
Company characteristics.
Activity sector in which it operates.
Objectives to be achieved with the system.
Information needs.
Information available.
Costs that are willing to bear by the cost system.
The aforementioned variables can be identified in any company under study.
Absorption cost method.
The cost for absorption or full cost (Full Costing): consists of applying to the product or service all the costs incurred for the elaboration of the product, be they directly attributable costs or those that in one way or another must be charged directly.
The aforementioned can be summarized as follows:
Diagram 1 Operation of the complete cost system.
Complete cost systems provide a higher quality of information that affects indirect costs.
The full cost accounting method allows:
Compare the final cost of a product with its sale price, and consequently measure its profitability;
Study in detail the different moments of the accounting process in terms of cost;
Offer a real valuation of permanent inventories of finished products and products in progress.
The emergence of the complete method, seen in this way, should not be judged as an insufficient method and not very capable of solving the entity's problems, since it played an important role in industrial development.
Its main limitations today are that:
It does not offer adequate information to make certain decisions such as whether to continue manufacturing a product or to eliminate it.
It does not provide the necessary information to establish a correct pricing policy.
It contemplates the average cost of the product for a given level of activity, also knowing that variations in activity have a different influence on the different costs that make up the final cost of the product.
Given the inflexible principle of having to apply everything, truly arbitrary indirect cost distribution procedures are used.
It is not possible to clearly establish individual responsibility for the greater or lesser efficiency of the results.
As can be seen, this method maintains that all the costs incurred by the company to produce and sell its production and sales costs and that, therefore, all costs must be incorporated into the final cost of the product.
The direct cost method.
Direct cost or variable or marginal cost (Direct Costing): it is the one that takes into account only those costs that are directly assignable, with objective criteria, to the corresponding product or service.
Thus, for example, in an industrial company the costs of the raw materials that are required for the manufacture of the product will be taken into account. In some cases, the costs corresponding to direct labor (the one directly involved in the elaboration of the product, or simply, the one directly identified with the product) and the variable indirect costs related to the process will also be taken into account. of production.
The previous criterion can be synthesized as follows:
Diagram 2. Functioning of the direct cost system.
Among the fundamental aspects that characterize the direct cost method, the following can be mentioned:
- It only considers variable and indirect indirect costs as product costs. Fixed costs are considered as accounting period costs. Fixed costs are excluded from the industrial valuation of final products. Unit variable cost is constant, while the cost is constant. Fixed is decreasing in relation to the number of units produced.
What advantages does this method offer?
It allows calculating provisional benefits immediately.
It allows to identify the relative participation of each product in the results of the company.
It allows to calculate the break-even point and guide the sale price policy by areas, sellers.
It facilitates decision-making in the different cost analytical centers in relation to the optimization of controllable costs.
In cases of shortage of orders, the limit prices below which the manufacturing of the product is of no interest are calculated.
Avoid arbitrariness in apportioning fixed costs between manufactured products.
The aforementioned could suggest that it is the ideal method to solve all the problems of Cost Accounting. But this is not really the case, since the type of information that you want to obtain must always be taken into account in accordance with the decision to be made. It is a method that also has limitations, which are disclosed below:
It is inadequate to determine the costs of products on farms with differentiated production programs.
It further complicates the problem of sharing joint costs.
It leads to distorted information from cost analytical centers by not taking into account their structural loads.
When valuing inventories at variable costs, they appear undervalued, which is not admissible from a fiscal point of view, nor convenient from a patrimonial point of view.
As argued so far, traditional Cost Accounting systems apportion manufacturing overhead proportionally to the cost of direct labor. As companies use advanced production technologies, manufacturing overhead costs rise, while the value of direct labor decreases. Therefore, the distribution of indirect costs proportionally to the direct labor leads to an incorrect costing of the products.
Given this phenomenon, ABC (Activity Based Costing) technology arises, which is based on a basic hypothesis: the different activities carried out in the company are those that consume resources and those that originate costs, not products. The products only demand the activities necessary to obtain them, proposing a new alternative in the treatment of the indirect costs of the final product.
It argues that it is not products or services that consume costs; as until now it was analyzed; but the activities.
Based on this principle, the system deepens its study of activities, their usefulness and, above all, their cost. Therefore the activities are now the center of the system and not the products as it had been happening.
Traditionally, cost systems were the answer to the question: How can the organization impute costs to be able to carry out financial reports and to control costs in departments? The ABC system carries with it a completely different set of questions:
- What activities are carried out in the organization? How much does it cost to carry out the activities? Why does the organization need to carry out business activities and processes? What part or quantity of each activity do products, services and customers require?
Therefore, the usual process is that indirect costs are assigned to the corresponding sections or cost centers. Subsequently, the costs of the sections are distributed to the activities carried out in each section and, finally, the costs of the activities are divided among the products, depending on the causes or inducers of costs (See figure 1).
Figure 1. Distribution of costs to products in an activity-based cost system.
The previous process can also be done, in certain companies, without going through the sections. In this case, indirect costs are charged to activities.
The ABC system involves going through several stages, in the event that sections are used:
- Divide the company into sections or cost centers. Distribute indirect costs by sections, according to criteria. Divide the sections into activities. Decide the distribution criteria of the sections to the activities. Distribute the costs of the sections by activities. Choose the inductors Assign the costs of the activities to the products.
With ABC, cost management can be carried out more successfully, through the management of activities. In this way, it tries to eliminate activities that do not add value, that is, unnecessary activities that consume resources and offer no value to the product.
The implementation of this cost management system has its well-defined objectives, among which are:
- Strategic vision of the resources consumed in the processes. Assessment of the tasks that are being carried out within the organization. Elimination or reduction of tasks that do not provide or add little added value to the client. Promote tasks that provide high added value to clients..
Once the objectives pursued by the ABC method have been evaluated, the advantages that this method offers companies must be substantiated:
- Organizational structures of a functional nature are not directly affected, since the ABC manages the activities and they are arranged horizontally. Therefore, changes in the organization are not reflected in the system. It helps to understand the behavior of the entity's costs and, on the other hand; It is a management tool that could make financial projections. The ABC perspective provides information on the causes that generate the activity, as well as an analysis of how the tasks are carried out. Knowing the origin of the cost allows us to pay more attention from the place that occurs to the completion of the product. It allows us to have a real view (horizontally) of what is happening in the company. So,It is important to know what the client needs and the conditions that are in place to satisfy it. If this were not a concern of managers, then: What would be the use of carrying out activities that the client does not demand? Why should unnecessary costs be passed on if they are not really what the customer requires? 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 its objective in such a way that they cannot be manipulated given the characteristics of the proposed method. It facilitates strategic decision-making since it shows the real level of competitiveness of the company, as well as the possibilities of success or failure compared to the competition. It facilitates and allows the elimination of those activities that do not generate value, in addition,It facilitates the a priori calculation of the activities that you want to incorporate, as well as the impact that they cause to be carried out.
It would be inconceivable to think that any cost method, no matter how sophisticated it is, is exempt from having limitations, among which we can mention:
- There may be a tendency to emphasize the adequacy of the current cost system. Selecting too many activities may make the cost calculation system more expensive. Certain indirect administration, marketing and management costs are difficult to attribute to the activities.
Once the advantages and limitations are known, it is necessary to show the phases of the ABC Method for a better understanding of it, which is summarized as follows:
Therefore, it is about shedding light on unanswered questions in financial accounting. Given its internal nature, each company can use the management accounting system that seems most adapted to their needs. Once these elements are known, the results of the research could be disclosed.
As can be seen with the ABC system, the priority is the correct selection of activities and the client, and subsequently integrating the workers of the process to the goals of the company to achieve continuous improvement of the production process.
3. Proposed procedures for the application of the philosophy of the activities in the industrial process of henequen.
The procedures proposed for the application of the costing method based on the activities related to the industrial phase of henequen can be observed in a practical way through analyzes and calculations that will be shown in this section.
Once all the activities related to the industrial process have been identified and the cost of each one known, taking into account the resources consumed, the cost of the auxiliary activities is distributed to the main activities.
After having determined the cost of each main activity and known the level to which it corresponds and the cost inducer of each of these activities, each of these elements is shown as a summary, which are necessary to facilitate the calculation of the distribution rate.
| CALCULATION OF THE COST OF ACTIVITIES. | |||||
| TOTAL COST | |||||
| LEVELS | ACTIVITIES | COST INDUCTOR | JANUARY | FEBRUARY | MARCH |
| Unit level | Transfer of henequen leaves. | No.of trips | $ 1138.40 | $ 1979,40 | $ 1,496.29 |
| Preparation of leaves | No. of prepared decks | 6047.24 | 7,969.72 | 4,030.39 | |
| Fiber transfer
wet to the tendal |
No.of trips | 1,131.47 | 1232.60 | 831.52 | |
| Laying and drying | Hours of labor | 2,612.12 | 2,063.69 | 1,292.32 | |
| Fiber elk | Mgw / Hour | 334.80 | 429.62 | 338.15 | |
| Batch level | Mallet of Mallets | No. of raised decks | 832.31 | 1,452.38 | 1102.90 |
| Deck stowage | No. of decks transferred | 7,239.07 | 8857.12 | 4,615.32 | |
| Collection of dry fibers. | No. of decks collected | 1,456.39 | 1,595.64 | 1,033.86 | |
| Fiber transfer
to the warehouse. |
Hours of labor | 197.79 | 216.8 | 140.27 | |
| Level of | Reception of wet fibers. | Hours of labor | 628.18 | 698.45 | 459.16 |
| product | Pressing fibers | No. of bales | 865.73 | 1,012.39 | 712.68 |
For the practical determination of the distribution rates, the following additional information of the cost inducers obtained in the Henequenera Farm “Amado Cuellar” is used
| ADDITIONAL INFORMATION. | |||||
| INDUCTOR | JANUARY | FEBRUARY | MARCH | ||
| No. of henequen trips | 43 | 94 | 47 | ||
| No. of wet fiber trips to the string | 408 | 456 | 288 | ||
| No. of lifted, prepared and stacked decks. | 77600 | 106800 | 52800 | ||
| No. of dry fiber bundles | 7308 | 10980 | 5940 | ||
| Qty of bales pressed | 203 | 305 | 165 | ||
| MGW / Hours | 1016 | 1600 | 1400 |
| HOURS OF DIRECT LABOR
|
|||
| Exercise | January | February | March |
| Laying and drying | 1.07 | 1.07 | 1.07 |
| Fiber transfer to the warehouse | 1.17 | 1.17 | 1.17 |
| Wet fiber reception | 1.20 | 1.22 | 1.22 |
Determination of accounting rates.
It is appropriate to clarify that this cost is only that of the shredding process.
After analyzing everything related to the cost of producing a ton of henequen fiber at the Henequenera "Amado Cuellar" Farm in the first quarter of this year, the following conclusions and recommendations are reached.
CONCLUSIONS
- The method of costing by activities shows superior and more accurate results than the method used by the Henequenera Farm “Amado Cuellar” to record its costs. This method allows us to specify more precisely what costs correspond to each activity, which avoids an incorrect distribution to the end of the period analyzed.The proposed method facilitates greater control of the information that the entity must provide, avoiding the diversion of resources.The activity-based costing distributes indirect costs according to the element that generates those costs, using appropriate bases for each one. In this method fixed costs are treated as period costs. This method can be used by other henequeneras farms and even by farms of another type of production,if you take into account the activities to choose and the rates to be used. Livestock activity within the company contributes considerably to reducing the cost and increasing the performance of the company's productive activity in obtaining the henequen plant.
RECOMMENDATIONS
- That the Henequenera Farm "Amado Cuellar" implements the costing method based on activities, knowing the advantage thereof with respect to the method currently being updated. A cost register must be implemented that actually reflects the resources consumed in each activity. Activity-based costing gives the possibility of using rates to estimate indirect costs, so the entity must use the necessary rates. The unit will have the methodology to follow to implement a cost-per-activities system, which will greatly benefit the work and the results; as well as the decision-making process. To achieve the expected results with the implementation of this method, the economic personnel of said unit must be trained.The Henequenera Farm "Amado Cuellar" must consider the fixed costs as costs of the period, without distributing it among the products, since it would lead to their price increases.
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