The satisfactory quality of the product and service goes hand in hand with satisfactory costs of quality and service. One of the main obstacles to establishing a more dynamic quality program in previous years was the mistaken notion that achieving better quality requires much higher cost. Nothing could have been further from the truth in industrial experience.
Manufacturing for an Industrial Engineer and its Organization is to consume or transform inputs for the production of goods or services. Manufacturing is a transformation process that requires a set of goods and services, called elements, and are the parts with which a product or service is made
foundations-of-the-economy-of-quality-systems-in-industrial-engineering-upiicsa-ipnCosts can be classified in various ways:
- According to the accounting periods:
- current costs: those incurred during the production cycle to which they are allocated (eg, driving force, wages). expected costs: they incorporate the charges into the costs in advance of the moment in which the payment is actually made (eg: periodic social charges). deferred costs: expenditures that are made in a deferred form (eg insurance, rentals, depreciation, etc.).
- industrial costs commercial costs financial costs
- direct costs: those whose monetary impact on a product or work order can be precisely established (raw material, wages, etc.) indirect costs: those that cannot be accurately assigned; therefore a proration basis (insurance, lubricants) is required.
- variable costs: the total change in relation to changes in a cost factor. fixed costs: They do not change despite changes in a cost factor. semi-fixed costs
Cost factor: Distribution base for cost allocation, depending on the cost object.
Unit or average cost: It arises from dividing the total cost by a number of units.
The following table shows the cost classification developed earlier:
| Accounting periods | Role they play | Nature | Method of allocation to product units | Variability type |
| 1 Current costs
Driving force Wages Salaries Etc. 2 Expected costs Periodic social charges 3 Deferred costs Insurance Rentals Initiation costs Depreciation |
1 Industrial
A - Producer Centers Cost Center A Cost Center B Cost Center C B - Service centers • Direct Maintenance Power plant Boiler • Indirect Material warehouses Laboratory Administration Commercial 3 Financial |
1 Materials
Raw material A Raw Material B Raw Material C 2 wages 3 Factory charges Driving force Lubricants Royalties Depreciation Insurance Salaries Social charges. |
1 Direct
Raw material Wages Royalties 2 Indirect Driving force Lubricants Depreciation Insurance |
1 variables
Fixed Semifixes |
- Products in Process: It is the incomplete production; materials that are only partially converted into finished products that may exist at any time. Costs: they represent a portion of the purchase price of articles, properties or services, which has been deferred or has not yet been applied to the realization of income. Expenses: are costs that have been applied against income for a certain period. Losses: reductions in the company's participation for which no compensatory value has been received, not including capital withdrawals.
COST OF MANUFACTURE
The three elements of manufacturing cost are:
- Raw materials: All those physical elements that are essential to consume during the process of making a product, its accessories and its packaging. This with the condition that the consumption of the input must be proportionally related to the number of units produced.
- Direct labor: Value of the work carried out by the operators who contribute to the production process. factory load: They are all the costs that a center needs to incur to achieve its goals; costs that, except in exceptional cases, are indirectly assigned, therefore it requires distribution bases.
The sum of raw materials and direct labor constitute the prime cost.
The combination of direct labor and factory load constitutes the conversion cost, so called because it is the cost of converting raw materials into finished products.
Cost accounting cycle: The flow of production costs follows the physical movement of raw materials as they are received, stored, spent, and converted into finished goods. The flow of production costs results in statements of income, cost of sales and cost of manufactured items.
Cost systems: A cost system is a set of procedures and techniques to calculate the cost of different activities.
According to the treatment of fixed costs:
Absorption cost: All manufacturing costs are included in the product cost, as well as all non-manufacturing costs are excluded. The basic characteristic of this system is the distinction that is made between the product and the costs of the period, that is, the costs that are manufacturing and those that are not.
Variable cost: Manufacturing costs are assigned to manufactured products. The main distinction under this system is the one between fixed and variable costs. Variable costs are the only ones directly incurred in the manufacture of a product. Fixed costs represent the ability to produce or sell, and regardless of whether or not the products are manufactured and carried over to the period, they would not be invented. Total fixed manufacturing costs remain constant at any production volume. Total variable costs increase in direct proportion to changes that occur in production.
The amount and presentation of profits varies under both methods. If the variable cost method is used, variable costs must be deducted from sales, since they are costs that would not normally be incurred if the items were not produced.
According to the way of concentration of costs:
Cost per order: It is used when manufactured according to special customer requests.
Costing by processes: It is used when the production is repetitive and diversified, although the articles are quite uniform with each other.
According to the costing method:
Historical or resulting cost: First it is consumed and then the cost is determined by virtue of the actual inputs. It can be used in both order costs and process costs.
Default cost: Costs are calculated according to estimated consumption. Within these predetermined costs we can identify 2 systems:
Estimated cost or budget: only applies when working on orders. They are costs that are set according to previous experiences. Its basic objective is to set sale prices.
Standard cost: Applies in case of work by processes. Standard costs can be scientifically based (if it is intended to measure operational efficiency) or empirical (if their objective is to set sales prices). In both cases the variations are considered inefficiencies and are settled by profit and loss.
PRODUCTION COSTS
Manufacturing is consuming or transforming inputs for the production of goods or services. Manufacturing is a transformation process that requires a set of goods and services, called elements, and they are the parts with which a product or service is made:
- Direct materials Direct labor Indirect manufacturing costs.
The registration of these elements consists of two parts:
- Concentration of costs by items (debit from account) Transformation of items by incorporation into processes (credit account).
Administration, planning and control do another function: coordination, which is especially related to:
- Number and quality of component parts. Inventory levels (physical resources) or availability (human resources). Procurement or procurement and contracting policies.
Cost schemes.
- Prime cost: or first cost, made up of the sum: MATERIALS + LABOR. Conversion cost: LABOR + INDIRECT MANUFACTURING COSTS. Production cost: MATERIALS + LABOR MANUFACTURE. INDIRECT MANUFACTURING COSTS.
| MAT. COUSIN | MOD | CIF | CD | UTILITIES | BONUS |
| Prime cost | |||||
| Conversion cost | |||||
| Production cost | |||||
| Total cost | |||||
| Net price | |||||
| Gross price |
Another important distinction is:
- Expenses: items or concepts that a production and sale process demands. It is considered a negative result of the period to which they correspond (administration expenses, which are not capitalized). Costs: items or items consumed by the production of a good or the provision of a service. They are activatable until the period of their sale, in which they become a negative result, which, compared to the income generated by the sale, determines the gross profit.
Activable accruals are a cost and those that do not meet this condition constitute an expense.
The cost of a good is necessary to put it in a condition to be sold or used, as appropriate depending on its destination. Therefore, it includes the allocable portion of the costs of the external and internal services necessary for it (for example: freight, insurance, costs of the purchasing function, costs of the production sector), in addition to direct or indirect materials or supplies. required for its elaboration, preparation or assembly. The allocations of indirect costs should be practiced on reasonable bases that consider the nature of the service acquired or produced and the way in which its costs have been generated. This definition implies adopting the concept of integral or absorption cost.
In the long term, all costs have the same destination: negative result.
The difference lies in the period in which they are imputed as results, because their service potential has been consumed.
As long as they have the capacity to generate an income - through the sale - they are an asset. On the other hand, expenses are concepts or disbursements that are exhausted in the same year of their accrual, and consequently they do not have the capacity to generate future income.
Costs, expenses and losses:
Costs represent a portion of the purchase price of articles, properties or services that has been deferred or has not yet been applied to the realization of income (fixed assets and inventories).
Expenses are costs that have been applied against income for a certain period (office wages).
Losses are reductions in the company's share for which no compensatory value has been received, not including capital withdrawals (destruction of a plant by hurricane or fire).
The profit for the period is derived from the following formula:
Where, U = utility
V = sales
Cpr = product costs
Cpe = period costs
Product costs are the factory costs that are allocated to produced profits, charged to inventories, and converted to expenses after products are sold; until then, inventory accounts are kept and appear on the balance sheet and not in the income statement.
Period costs or expenses do not correspond to the manufacturing process itself and are charged to each period as they occur.
In general, the higher the proportion of total costs allocated to products, the more accurate the matching process will be to measure utility. The reasons why non-manufacturing costs are excluded from products are:
- Non-manufacturing costs are not as easily identified with products as manufacturing costs. Non-manufacturing costs usually occur sometime after the products have been manufactured and inventoried. Non-manufacturing costs tend to remain relatively constant from period to period, or at least do not fluctuate relative to the factory's varying levels of production.If non-manufacturing costs were treated as product costs that can be inventoried, it would result an increase in inventory values.
Determining the cost of products is one of the three objectives of cost accounting.
In the absence of the cost accounting system, it is necessary to consider the initial and final physical inventories to determine which, among the costs of products incurred during the period, are assignable to sales and which are applied to unsold stocks.
Important factors in a cost system:
- Taking a physical inventory is costly and time-consuming. Even if you do a physical inventory, the absence of data on the cost of the product requires cost estimates, to value inventories. In these cases, the technique of estimating ending inventories is usually used on the basis of an assumed gross profit index applied to sales. The use of this estimated gross profit index can lead to serious calculation errors. The true gross profit may differ from that estimated due to fluctuations in sales prices and costs in the mix of products sold, that is, some products may achieve a gross profit higher or lower than the company average.
STUDY OF STANDARD COSTS FOR DECISION MAKING
Like estimates, these are also calculated before the manufacturing operations process.
They determine in a technical way the unit cost of a product, based on efficient methods and systems, and based on a given volume of activity. They are scientifically predetermined costs that serve as the basis for measuring actual performance. Standard accounting costs do not need to be incorporated into the accounting system. Manufacturing cost standards are generally formally integrated into cost accounts. When this occurs, the systems are known as standard cost accounting systems.
They are established under rigid quality principles, fulfilling the role of objective costs, informing the administrator about the degree of compliance of the plant with these target or target costs.
This mission makes it a unit of measurement for manufacturing efficiency.
Standard costs are the opposite of actual costs. The latter are historical costs that have been incurred in a previous period. The difference between the actual cost and the standard cost is called the variance.
BRIEF COMMENTARY TO THE BUDGETARY PROCESS
When talking about the budget process, it is necessary to establish the differences between the concepts of planning and budgeting. In planning, the company's long-term objectives and plans must be gradually defined, while budgeting refers to the economic valuation of the operating plan for a certain period, in the short term. Therefore, it is necessary to comment on the following differentiating points:
- Budgeting involves making accurate estimates of both income and expenses. On the contrary, planning is neither necessary nor important. The development of a budget implies the definition of the different centers of responsibility in charge of developing the plans established by the planning function. Planning, compared to the budget, is less limited by the available resources that the company has.
The fundamental differences between the planning and budgeting functions are found in the objectives of both. In planning, the aim is to define the objectives to be achieved in the long term by the company, as well as the short-term action plans, while budgeting focuses on the quantification of the plans, trying to coordinate, evaluate and control the action plans. planned in advance, to achieve the established long-term objectives. It is an instrument to achieve planning
The next step is the preparation of the budget, in which the financial consequences of the operational plan are determined. This operational plan is a summary of the main action programs. For each of the different programs it must contain the following information:
- Description of the program and its relation to the strategic objective. Resource requirements, including labor costs of the various factors. Expected results. Calendar of dates by which key decision points must be met. Assignment of responsibilities..
Within the budgetary activity of the company various budgets are prepared: treasury, production, sales, investments, etc. From the point of view of the study of standard business costs and the analysis of deviations, as an element of economic analysis, we are interested in the study of the production or manufacturing budget.
The production budget will be drawn up, determining the program and the volume of production planned, it being necessary to mention the interdependence between the budgets of the different centers of the company, and especially between sales and production. Once the sales program has been approved, the production program is established, based on the company's product and stock management policy.
The established valuation is carried out by applying the standard cost of production, which, considering the complete cost system, will be made up of the cost of materials, direct labor cost and indirect manufacturing costs, made up of a variable cost part., which fluctuates with the volume of production and a component of fixed costs, independent of the quantity produced.
The standard cost system is a technique of Analytical Accounting to obtain an assessment of costs, products and results. It will provide us with information necessary for control and planning within a company. It is used to compare the actual facts "a posteriori" with the estimated facts "a priori" and to carry out the economic analysis of the different deviations produced and apply the necessary measures derived from it.
CONCEPT AND ADVANTAGES OF STANDARD COSTS
The fundamental characteristics of standard costs can be summarized as:
- They are costs previously calculated based on desired work characteristics or values considered as objectives to be achieved in a given period. They are reference values that allow us to compare them with the actual situation of the activity. This is a previously established cost, before beginning the financial year to which they are referred. The calculation process for standard costs is exactly the same as for historical costs.
The application of an economic analysis based on standards has the following advantages:
- They constitute a reference instrument with which the historical data are to be compared. They are an essential aid for the determination of prices and the formulation of production policies within the company. They require a definition of responsibilities within the structure of the company by centers. of costs. They facilitate the valuation of stocks. The deviations arising from comparing the standard with the real cost allow management to make decisions for management control.
The standard cost is an expected value of the costs that the company will bear in the future. Any of the following concepts can be taken as the standard cost for a given exercise:
- A cost obtained from data from previous years. The actual cost of the previous year. The average cost of several previous years.
Once the financial year is finished and having knowledge of the actual costs incurred, they will be compared with the standard costs to see the differences or deviations between the budget and the actual. The analysis of deviations is essential for decision making in the company. These deviations can be positive or negative, depending on whether or not the standard costs are higher than the actual costs. The company will try to enhance the positive deviations and analyze the reasons for the negative ones and eliminate them.
The standard cost classes that you can work with in a budget process are:
- Optimal or theoretical standard cost: it is about obtaining the cost determining the best use of resources. The company works at full capacity and with maximum factor consumption efficiency. It does not consider the interruption of the production process and, therefore, it is a very little used standard. Historical standard cost: this type of standard is based on historical cost data from previous periods. Normal standard cost: it is calculated based on what the normal conditions of production and distribution of the company are considered. Historical data is analyzed to identify normal conditions, but attempts are made to include the most normal production conditions so that it represents an achievable cost objective.
A single standard can be established depending on the activity and production levels that have been programmed, giving rise to what is called «FIXED BUDGET». A budget is also drawn up that includes the different levels of activity, it is called "FLEXIBLE BUDGET", as we have previously commented. On certain occasions, a standard is prepared for one or several phases of the exploitation cycle, obtaining, in this case, "GLOBAL OPERATING BUDGET" that will quantify the expected result for the financial year to be carried out. The global operating budget must be coordinated with the treasury and investment budgets.
To study the standards we are going to consider the classification of costs in fixed and variable. Within each of these cost classes we will differentiate between direct and indirect costs. In this case, we distinguish between raw material costs, direct labor cost and general manufacturing costs. These costs are incorporated into the products and are those that make up the calculation of the standards. Administration and sales costs are generally not allocated to products and therefore do not affect forecast calculations.
CALCULATION AND ANALYSIS OF DEVIATIONS
The fundamental aspect in the study of standard costs is the analysis of deviations. Comparison by difference between standard and historical costs causes deviations. The existence of a deviation immediately implies the investigation of its causes and, therefore, will serve as the basis for the company's management of future decisions to be made.
The number of deviations that can be calculated when comparing the standard and historical costs will depend on the information needs and the means available to the company, and are the basis on which the investigation, evaluation and correction of the differences. The variations that we can find can be of three types:
- Deviations in quantity, linked to the performance and productivity of the different factors involved in production. They are caused by causes of an endogenous nature to the company.Deviations on prices, which affect the relationship of the company with the environment. They are derived from exogenous causes, linked to the law of market supply and demand. Deviations arising from variations in the employment rate of the means of production and whose causes may be of external or internal origin.
The global differences of each of the different cost factors involved in production are made up of two components: technical component, derived from different manufacturing times or quantities consumed and economic component, or derived from market prices.
DEVIATIONS IN DIRECT COSTS
For the study of direct standard costs, the nature of these costs, raw materials and labor must be considered, characterized by being variable within the activity levels for which the standard is calculated, as well as being simple costs, that is, they are obtained by multiplying a quantity consumed by a price.
This implies that the factors that can give rise to the deviation can be separated into direct costs, exogenous and endogenous, as we have previously commented. If we apply the ceteris paribus principle, when comparing the standard costs with the real ones, two types of deviations can be considered:
- Economic or price deviation. It originates from a comparison between the standard price and the effective price of the production actually obtained, assuming constant the unit consumption of the direct factor. Technical deviation or consumption. It arises by comparison between the preset consumption and the effective consumption of the factor, valued at a precise standard, for the production actually obtained.
Within the direct cost standard, it is necessary to study the deviations produced in the consumption of raw materials and in direct labor.
3.1.1 Deviation in raw material.
The raw material is a direct cost and as such causes two types of deviations: technical and economic. For the analytical study of both we are going to use the following nomenclature:
as: expected quantity of raw material consumed per product.
ar: unit quantity of actual raw material consumed per product.
pr: actual production obtained.
ps: standard production.
ir: real unit price of the factor.
is: standard unit price of the factor.
Technical deviation: it is defined as the difference between the standard consumption of raw materials for the production carried out and the actual consumption for the same production, all evaluated at the standard cost of the raw material
Dt = (Standard consumption for real production - Real consumption of real production) * standard price
Dt = * is = pr * is * (as - ar)
Economic deviation: we measure the difference between the standard price and the effective price for consumption made over the quantity actually purchased.
The raw material is an inventoryable element, there being a time lag between the moment of acquisition and the moment of its incorporation into the production process, that is, as a consequence of its storage. This problem is solved considering two types of standard, one to calculate its deviation at the time of purchase and another at the time of application to the production process as a result of storage and the supply costs that may arise.
Hence, the deviation in raw material has two components: that derived from the purchase of materials, that is, the economic deviation calculated at the time of entry of raw materials into storage and, on the other hand, the difference between the costs standard of the provisioning section and the actual costs of said section, taking into account that these costs are indirect costs, undergoing a different treatment than deviations from direct costs, and which we will analyze later.
The economic deviation will be the sum of the purchase economic deviation plus the supply section deviation.
From purchase = Standard price of actual purchase - Actual price of actual purchase
Of in purchase =
The global deviation in raw material will therefore be the sum of the economic deviation and the technical deviation.
3.1.2 Deviation in direct labor.
The labor a direct cost and therefore, the deviations are similar to those established for the raw material. Deviations in the cost of direct labor often have two origins:
- A greater or lesser number of operators than expected when the standards were established or the greater use of their working time. Higher or lower wages than those indicated by the standards.
If we assume the same terminology as that used for the raw material, the analytical calculation is established in a similar way.
Economic deviation: The calculation of this deviation is made by comparing the cost of the hours actually worked, valued at standard unit prices, with the cost of the hours actually worked, but valued at real unit prices of labor. All calculations for the production actually obtained.
From = (Standard price of actual consumption - Actual price of actual consumption) * No. of actual hours
From = pr *
ar indicates the number of hours used to manufacture the product, that is, the consumption of direct labor per unit of product.
Technical deviation: it is obtained by comparing the hours actually worked with the hours that according to the standard cost would have been worked to obtain the actual production for the period, valued at the standard cost of labor. This deviation will measure the greater or lesser productivity of labor.
Dt = (Nº standard hours - Nº real hours) * standard price of direct labor
Dt = * is
The global deviation of direct labor will be the sum of the economic component and the technical component.
DEVIATIONS IN INDIRECT COSTS.
Within the set of indirect costs, we include the rest of the costs borne by the company throughout the study period. Due to its characteristics, the treatment of standard costs and the analysis of deviations is different from that studied for direct costs, given the particular characteristics of indirect factors and which we summarize:
- Because indirect costs cannot be directly affected by the product, we must make the allocation according to a cost aggregation model, mainly sections, department, functions, etc. that responds to the organization of the company itself. These are costs, in turn, made up of a set of various cost factors.
For the calculation of this set of deviations, it is necessary to perform certain additional calculations:
- a) Imputation coefficients: established based on the work unit that measures the activity of the section or cost center. They can be defined as the number of work units per product unit. Two different imputation coefficients are defined:
- Standard (gs): it is defined as the quotient between the number of units of work foreseen for the section and the predicted production.Real (gr): it is defined as the quotient between the number of units of real work of the section and the production real.
Imputation coefficients are a concept analogous to unit consumption at a direct cost, since it measures the number of physical units consumed by each unit of product.
- b) Unit prices: they are obtained in the same way as the imputation coefficients:
- Standard (is): quotient between the budget of each section and the number of planned work units of the section. Real (go): quotient between the real costs of each section and the number of real work units of the section.
Once the company has prepared a budget for each of the different sections or cost centers, the imputation coefficients have been defined as unit consumption and the unit prices of the different consumptions have been determined, the different deviations in indirect costs, which are divided into three components:
Deviation in quantity or efficiency: It is defined as the difference between the standard activity and the actual activity of each section or cost center, for the production actually obtained, this difference being valued at the standard cost of the section's work unit.
It is a concept similar to that of technical deviation, taking into account that consumption has been replaced by the activity of the cost center.
Dc = (standard activity for real production - real activity for this production) * standard price of the work unit.
Dc = * is
The first member of the difference measures the standard activity for the production actually carried out, that is, the activity that according to the standard must be carried out to achieve the production actually obtained.
Through this deviation, the over-application or under-application of manufacturing costs is measured due to the difference in the efficiencies of the hours used in actual production and those that should have been used in this same production according to manufacturing standards. A negative deviation indicates insufficiency in the use of productive factors, that is, a consumption higher than the real one. A positive deviation expresses an efficiency superior to the predicted one and its amount will measure us the saving of factors, at standard price.
Price deviation: it is calculated by comparing the standard price of the work unit of the section with the real price of the work unit, all taking into account the real activity of the section for the production actually obtained.
Dp = (standard price of the work unit - real price of the work unit) * number of real work units of the section.
This deviation can be broken down, in turn, into two:
Deviation in budget: it is calculated by comparing the cost budget established for the section with the effective cost of the section. It is obtained by difference between real consumption (real activity) at real prices with the budget of the section. The purpose of its analysis is to study whether or not the budget established in the financial year has been met.
Dp = (budgeted costs for the section - actual costs of the section)
Dp = (ps * gs * is) - (pr * gr * ir)
The purpose of this deviation is to verify the actual disbursements with the budgeted ones, without considering the effects of production.
Deviation in capacity or activity: It is the difference between the actual and the expected activity, all valued at standard prices. It differs from the deviation in productivity or efficiency in that the expected activity is calculated by applying the standard activity on the expected production and not on the actual production.
Da = (no. Of actual works - no. Of standard works) * standard prices for production
Da = (pr * gr * is) - (ps * gs * is)
It measures the over-application or under-application of fixed expenses due to the difference between the actual hours worked and the hours of capacity or activity that were planned to be used.
It occurs due to the fixed part of the indirect costs, since if all of them were totally variable, the capacity of the company would be adaptable to the level of activity and there would be no idle resources. For this reason, in order to correct the influence of fixed costs, the flexible budget hypothesis is introduced, which consists of adjusting the fixed part of indirect costs by means of an activity rate of the various sections or cost centers..
COSTS ON A FLEXIBLE BUDGET
In the calculation of deviations, the flexible budgeting technique can be used, which consists of adapting the cost level to the level of actual activity achieved, using, in the calculation, the budgeted work units for each group of factors.
The entire set of indirect business costs has two components, one fixed and the other variable, with changes in the level of activity having a very different impact on them. The fixed component of indirect costs must be corrected according to the activity carried out, to adapt the calculations to the business reality and to facilitate the analysis of the company. This characteristic of general manufacturing costs requires the calculation to be carried out in two parts, one referring to the behavior of variable costs and the other the degree of absorption of fixed costs. For this study, it is necessary to establish the relationship between the levels of real and budgeted activity.
The deviation in activity of each factor will measure the degree of occupation of the expected activity as it is the difference between the actual activity and the expected activity. When the flexible budget hypothesis is applied, the standard price used is obtained by dividing the fixed costs of the section and the number of planned work units of the same.
The fixed cost of the work unit is actually the only cost of said unit that subsists regardless of whether it is used or not, so when under-activity occurs in the hours worked, the cost per wasted hour will only be the component Fixed, since there is no activity, the variable component must not intervene.
From an economic analysis point of view, this budget deviation will only make sense if both budgeted and actual costs refer to the same unit of activity. This can only be achieved with the flexible budget hypothesis, which consists in valuing the difference between the effective activity of the period and that foreseen at the standard fixed cost of the work unit.
DEVIATIONS IN BUSINESS ANALYSIS
Deviations are an instrument not only of economic analysis, but also of control in the different phases of internal exploitation.
The effective analysis of deviations consists of three phases:
- location of the difference in punctuation of the amount presented, determination of its cause and attribution of responsibility for it.
The analysis phase is the function to be performed prior to the application of the correction measures. In order to carry out a function effectively, it will be necessary to know aspects of the deviations produced such as volume, nature of the detected fault or anomaly, phase of production in which they occur, person in charge of the production phase, etc. Therefore, to exercise control, it is necessary to know what the specific object of the control action should be.
The analysis of cost and deviations have the fundamental objective of investigating and defining the causes of costs in general and of abnormal events in particular. The corrective measure must be appropriate to each situation, to each cause, to achieve the objective for which they are intended. Every problem must be examined and solved in a timely manner and is only effective if practiced correctly.
The comparison between the standard result and the expected result allows us to analyze whether or not there is a deviation in the centers responsible and responsible for sales and what causes have caused such deviations in sales revenue, as well as the means to detect and correct them in financial years. successive. This comparison expresses, in terms of profit, non-compliance in the sales budget.
Deviations relative to actual sales revenue may be due to various reasons:
- because the units sold are as expected, but have not been sold at the expected unit sales price, because the number of units expected has not been sold because there is a combination of units sold different from those expected and the unit sale price different from the expected one
Deviations in purchase prices are a good measure to analyze supply management. There are external situations that justify these deviations, such as rigid prices in the market, increases not foreseen for political reasons, etc.; other situations may derive from the financial position of the company or to exclusive causes of those responsible for purchases derived from poor supply management.
In the manufacturing and transformation processes the most important deviations occur from a quantitative point of view, and therefore, they are the deviations calculated in indirect costs. Among these deviations we can highlight the following:
- The deviations in quantities of materials imputed to the products (higher actual consumption than budgeted for) originate from deficiencies in the operation of manufacturing equipment; in production scheduling defects; or in the waste in the consumption of direct materials. The deviations in time (technical) of transformation take place as a consequence of rejections and mismatches in the programming, in the technological situation of the productive equipment or, as a consequence of low performance of the labor. The economic deviations in transformation derive from the external components of costs, variations in prices.Deviations in differences in inventories of semi-finished products are the direct responsibility of the transformation centers where they have been manufactured and stored.
ESTIMATED, NORMAL, BUDGETED AND STANDARD COSTS
It is determined at the time of purchase of raw material by comparing the unit prices invoiced by the supplier and those provided for in the standard. Periodically, reports are prepared indicating the variations, breaking down:
- Purchase price (real and standard) Variations (favorable and unfavorable)
Different forms are used to request materials from the warehouse, which are:
- Standard requisition. Surplus requisition. Indirect materials requisition. Materials notes returned to the warehouse.
Procedure: with the standard requisitions, precisely what your name indicates is requested, and they constitute direct materials. Indirect material requisitions become part of the cif.
In an order cost system, vital information is that contained in the time card worked by labor operators in each order. In addition, they are also known:
- Standard time assigned to the order and the level of the operator's salary calculated according to his category and training (emerges from the standard). Cost of salary and real hours, paid to the worker according to the salary and wages schedule (data on their real values).
You can work with the method of the two or three variations. It is calculated by subtracting from the actual CIF (those actually consumed) the standard cost (working time of each production unit by its cost, both standard).
COSTS FOR MANUFACTURING ORDERS IN INDUSTRIAL ENGINEERING (COST ACCOUNTING)
The consumption of the elements is accumulated and identified by each order or order, which makes it possible to know the cost of each order or order.
Type of production activity:
It is especially appropriate when production consists of special jobs or processes rather than when the products are uniform and the production pattern is repetitive or continuous. It is also used when the time required to manufacture a unit of product is relatively long and when the sale price closely depends on the cost of production. It is also found in companies that produce various items, when production is scheduled by jobs (bolts and nuts).
In short, it is applied in industries that perform special works, at the request of customers, for stock, with non-standard design products or particular specifications. Examples: printers, furniture stores, mechanical or general repair shops, household appliances, buildings, road works, glass clothing, shoes, etc.
Costs that can be identified with a particular job, such as materials and labor, are charged directly to that job as soon as they are identified. Costs that are not directly related to any particular job are assigned to all jobs on some pro rata basis.
Most manufacturing overhead costs fall into the latter category although some, such as machine set-up time, overtime bonuses, and engineering designs, are often charged directly to applicable jobs. Predetermined indirect cost rates are particularly useful for costing work orders. Since actual indirect costs cannot be identified until the end of the month or year, labor costs cannot be known immediately after completion if indirect cost rates are not used.
Registration of work orders.
Because production does not have a constant rate, careful planning is required to achieve the most economical use of human potential and machinery. Production planning begins with the receipt of one order per customer. This is the basis for preparing and issuing a production order to the factory. The production order contains information and instructions for the factory regarding the product specifications, the time period for the manufacture, production route, machines to be used, etc.
Cost sheet:
The accounting document used is called the "job cost sheet," which contains the accumulation of costs for each job, subdivided into the main cost categories, as material requisitions are made and the hand is incurred. of work, the pertinent works are written down in the requisition forms of materials and time ticket.
Summarize separately the consumption of the elements demanded by each order or job. The information for its elaboration is obtained from:
- Material requisitions Time cards Quotas of indirect manufacturing costs
Materials and direct labor are charged to each job as identified by material requisitions and time cards. Instead, indirect costs are applied based on distribution bases.
The job cost sheet is a further auxiliary to the work in process account. At any time, the balance in this account is equal to the summed balances on the job cost sheets. When a job is completed, the cost is totaled on the cost sheet and used as the basis for transferring the order cost to Finished Products or Cost of Sales.
Accounting.
In this method, different types of work are generally performed, which receive the following names:
- Product: article entirely manufactured in the plant. Assembly: production consists of the assembly of parts, or the combination of several sub-assemblies. Sub-assembly: combination of two or more parts. In this case, generally both orders are issued at the same time. Component parts: they are manufactured for stock and subsequent assembly or assembly on request, that is, they are sets of two or more pieces. The component parts are issued separately to the assembly parts. Pieces: they are already elaborated materials that are used in the assembly of the product. Improvement orders: They consist of equipment, facilities, tools, etc., manufactured and for the company's own use, that is, goods produced in the same plant.
COSTS BY PROCESSES IN INDUSTRIAL ENGINEERING (COST ACCOUNTING)
In companies that use the process manufacturing system, relatively standardized products are produced to keep them in stock.
Corresponds to mass production techniques.
The division of labor and mechanization expanded the use of continuous and departmental processes, and outlined the process cost system.
Production processes:
A process is an entity or section of the company in which specific, specialized and repetitive work is done. Some terms used are: departments, cost centers, responsibility center, function and operation.
Any process can be used to manufacture various products. Also, any product may require processing in several processes. The production plan depends on the technical characteristics of the product and process design.
In addition to the nature of the product and process design, the organization and distribution of the plant also determines the relationship of the processes to each other (whether they are to be arranged as sequential processes or as parallel processes). Parallel processes operate independently of each other. The production of one of these parallel processes does not become a raw material or input for the other. When one process receives output from another process, both processes are within a sequential array.
Requirements:
It is applied in industries that work continuously or in series and in which the articles demand similar processes, and in which the raw material is transformed in stages until it reaches the degree of finished product.
The articles, in their majority homogeneous, consume equal costs of materials, labor and manufacturing indirect; in parallel or sequential processes and in which the units are measured in physical terms (liters, kilos, meters).
The unit cost is calculated by averaging between the sum of the costs consumed by the departments or processes in a period, and the quantities produced in it.
It is a simple and economic system, because there are no individual works or specific calculations per element.
It can be applied when:
- These are standard or homogeneous products. There are high production volumes.
The impossibility of knowing the costs consumed by each type of work, means that the expenditures are not accumulated per item, therefore the cost sheet is not used.
The elements are loaded to the departments or processes, and they are transferred from one to another, determining values:
- Transferred products. Production inventories in process.
In this system, reciprocal or sequential transfer between processes is common.
Process cost accounting.
Emphasis is placed on the accumulation of costs for a certain period of time (for example, one month), by processes, departments, functions or cost centers, for which a manager is responsible.
The costs that are direct with respect to the processes or departments are those that are important for the purposes of control. Costs that are directly related to the product are also directly related to the processes. However, for product costing purposes, costs that are indirectly related to processes are assigned to them on some reasonable basis.
After accumulating costs for each department or process, control reports and information are prepared for management. The costs for which each department or process manager is responsible are compared with some performance measure (budget allocations, standard costs or results from previous periods).
Once the cost accounts control information has been obtained, all elements of the cost of production are "passed" through the process accounts in order to determine the total manufacturing cost of the finished products. The opening inventory of work in progress plus the three elements of the cost of production that are put in process over a period of time must be accounted for.
The flow of costs for the accounts is carried out by crediting a process and charging the following process (or finished products) for the cost of the transferred items. The remaining balances in the process accounts form the work in process inventory.
The unit cost of the product is obtained by dividing the units of manufactured or processed products by the cost of manufactured or processed items. These unit costs accumulate as they are passed from one department to another in a sequential process situation, so that the finished product bears the cumulative cost of all the operations carried out. These product cost data are then used for utility determination, inventory costing, and administrative decision making, such as pricing.
Work in process inventory:
Part of the difficulty in determining the cost of work-in-process inventory is due to the fact that unfinished production can be located in one or all production processes, as well as between processes, in a sequential process arrangement. To be more convenient, inventories between processes are considered as inventories in process of the previous process.
The different inventories should be calculated and added together to constitute the total inventory of work in process to be used in the cost statement of manufactured products and in the balance sheet.
In order to allocate production costs, either to finished and transferred items in a process, or to those that make up the final inventory of work in progress, you must know how materials are added to production. In general, materials can be added to the product at the beginning of the processing stage, continuously through the entire process, at certain stages of completion, or at the end of the process.
It is generally assumed that direct labor costs and indirect manufacturing costs are allocated to the product uniformly through processing.
Registration.
In the production stage, as many accounts are used as there are manufacturing departments in the process.
Each of these is debited for the consumption of the elements and credited for the cost of the units transferred to the next or to the finished product warehouse, as the case may be, representing its balance - at the end of the period - the production inventory in process.
Unit cost.
The unit cost calculation is carried out, among others, by the five-step method, which follows the sequence:
- Processed computable production Unit cost Average unit cost Cost of finished production Final inventory cost production in process
These steps are linked to the following concepts:
- Costs incurred: those consumed by the three elements and during a period. Processed production: quantity of production in process in a period, in terms of equivalent units. Unit costs: ratio between period costs and computed processed production. Computable processed production: calculated per element and using the following formula:
Production finished + Inv. End of Prod. In Proc. - Inv. Initial of Prod. In Proc.
Both inventories expressed in terms of equivalent production.
Equivalent production.
As the elements are not incorporated in the same way into the processes, but they do so at different times and quantities, a difficulty arises in calculating the unit cost, which is overcome with the concept of equivalent production.
Equivalent output is the number of items that would be completed if all period costs or efforts were applied exclusively to finishing units. In other words: the measurement of the work done in a department based on fully finished products.
It is calculated by establishing the degree of progress or completion of production in process, both initial and final.
The calculation of the degree of completion or progress is the responsibility of the factory engineer, not the task of the administrator or accountants.
The inventory of the process accounts is valued using the equivalent production concept.
The calculation of final costs depends on the form of production, since there are many variants:
- Production of a single article with total incorporation of materials in the first process. Manufacture of a single product, using raw materials in all departments. Production of several manufactures, with separate materials for each or not, and incorporation in the first process. of materials, or in all departments.
Importance of unit cost data.
It is essential to know the unit costs of the product if you want to do an inventory costing, or measure the profits. Unit cost data can also be useful for cost control and decision making. Some companies prepare reports on a regular period, for example months, quarters, etc., in which the real gross profit per unit is compared with the standard gross profit. This type of information may lead to price action, or may focus attention on potential areas of cost reduction.
BY WAY OF SUMMARY:
The new and close relationship between economic growth and the cost of quality means that quality control and quality economics must become two of the main elements of the company's strategic planning and its important administrative actions to achieve a competitive economic strength in national and international markets. Quality control and quality costs must be managed in a way that provides the company with significant added value to the business. Thus, the measurement and control of quality costs will increasingly assume a position of central importance in the plans and actions of the company administration as a general rule - not as a special case, which has sometimes been the condition in times earlier and less demanding.
REFERENCES AND WEB LINKS:
| Industrial Engineering Published Work (UPIICSA - IPN) |
| Engineering of Work Methods |
| http://www.monografias.com/trabajos12/ingdemet/ingdemet.shtml |
| Work Measurement Engineering |
| http://www.monografias.com/trabajos12/medtrab/medtrab.shtml |
| Quality Control - Its Origins |
| http://www.monografias.com/trabajos11/primdep/primdep.shtml |
| Market research |
| http://www.monografias.com/trabajos11/invmerc/invmerc.shtml |
| Method Engineering - Production Analysis |
| http://www.monografias.com/trabajos12/andeprod/andeprod.shtml |
| Measurement Engineering - Standard Time Applications |
| http://www.monografias.com/trabajos12/ingdemeti/ingdemeti.shtml |
| Chemistry - Atom |
| http://www.monografias.com/trabajos12/atomo/atomo.shtml |
| Plant Distribution and Materials Management (UPIICSA) |
| http://www.monografias.com/trabajos12/distpla/distpla.shtml |
| University Physics - Classical Mechanics |
| http://www.monografias.com/trabajos12/henerg/henerg.shtml |
| UPIICSA - Industrial Engineering |
| http://www.monografias.com/trabajos12/hlaunid/hlaunid.shtml |
| Mechanical Tests (Destructive Tests) |
| http://www.monografias.com/trabajos12/pruemec/pruemec.shtml |
| Classical Mechanics - One-dimensional movement |
| http://www.monografias.com/trabajos12/moviunid/moviunid.shtml |
| Quality Control - Shewhart Control Charts |
| http://www.monografias.com/trabajos12/concalgra/concalgra.shtml |
| Chemistry - UPIICSA Physicochemistry Course |
| http://www.monografias.com/trabajos12/fisico/fisico.shtml |
| Method Engineering - Work Sampling |
| http://www.monografias.com/trabajos12/immuestr/immuestr.shtml |
| Biology and Industrial Engineering |
| http://www.monografias.com/trabajos12/biolo/biolo.shtml |
| Linear Algebra - UPIICSA Exams |
| http://www.monografias.com/trabajos12/exal/exal.shtml |
| Laboratory Practices of Electricity (UPIICSA) |
| http://www.monografias.com/trabajos12/label/label.shtml |
| Practices of the UP Chemistry Laboratory |
| http://www.monografias.com/trabajos12/prala/prala.shtml |
| Physics Problems by Resnick, Halliday, Krane (UPIICSA) |
| http://www.monografias.com/trabajos12/resni/resni.shtml |
| Biochemistry |
| http://www.monografias.com/trabajos12/bioqui/bioqui.shtml |
| Theory of the Company |
| http://www.monografias.com/trabajos12/empre/empre.shtml |
| Code of ethics |
| http://www.monografias.com/trabajos12/eticaplic/eticaplic.shtml |
| Method Engineering: Systematic Analysis of Production 2 |
| http://www.monografias.com/trabajos12/igmanalis/igmanalis.shtml |
| University Physics - Oscillations and Harmonic Movement |
| http://www.monografias.com/trabajos13/fiuni/fiuni.shtml |
| Chemical Production - The world of plastics |
| http://www.monografias.com/trabajos13/plasti/plasti.shtml |
| Plastics and Applications - Case Study at UPIICSA |
| http://www.monografias.com/trabajos13/plapli/plapli.shtml |
| Production Planning and Control (PCP - UPIICSA) |
| http://www.monografias.com/trabajos13/placo/placo.shtml |
| Operations Research - Linear Programming |
| http://www.monografias.com/trabajos13/upicsa/upicsa.shtml |
| Legislation and Mechanisms for Industrial Promotion |
| http://www.monografias.com/trabajos13/legislac/legislac.shtml |
| Operations Research - Simplex Method |
| http://www.monografias.com/trabajos13/icerodos/icerodos.shtml |
| Published work of History and Philosophy |
| Understanding Today's World by Ricardo Yépez Stork |
| http://www.monografias.com/trabajos12/entenmun/entenmun.shtml |
| The Power of Self Esteem |
| http://www.monografias.com/trabajos12/elpoderde/elpoderde.shtml |
| Mexico from 1928 to 1934 |
| http://www.monografias.com/trabajos12/hmentre/hmentre.shtml |
| Mexican Independence Stage |
| http://www.monografias.com/trabajos12/hmetapas/hmetapas.shtml |
| Vicente Fox |
| http://www.monografias.com/trabajos12/hmelecc/hmelecc.shtml |
| The Profile of man and Culture in Mexico |
| http://www.monografias.com/trabajos12/perfhom/perfhom.shtml |
| Religions and morals |
| http://www.monografias.com/trabajos12/mortest/mortest.shtml |
| Moral - Salvifichi Doloris
www.monografias.com/trabajos12/morsalvi/morsalvi.shtml |
| The government of General Manuel González |
| http://www.monografias.com/trabajos12/hmmanuel/hmmanuel.shtml |
| José López Portillo |
| http://www.monografias.com/trabajos12/hmlopez/hmlopez.shtml |
| Museum of Cultures |
| http://www.monografias.com/trabajos12/hmmuseo/hmmuseo.shtml |
| Man and the Robot: In search of harmony |
| http://www.monografias.com/trabajos12/hommaq/hommaq.shtml |
| History of Mexico - The Laws of Reform |
| http://www.monografias.com/trabajos12/hmleyes/hmleyes.shtml |
| History of Mexico - Inquisition in New Spain |
| http://www.monografias.com/trabajos12/hminqui/hminqui.shtml |
| History of Mexico - The French Intervention |
| http://www.monografias.com/trabajos12/hminterv/hminterv.shtml |
| History of Mexico - First Centralist Government |
| http://www.monografias.com/trabajos12/hmprimer/hmprimer.shtml |
| History of Mexico - El Maximato |
| http://www.monografias.com/trabajos12/hmmaximt/hmmaximt.shtml |
| History of Mexico - The War with the United States |
| http://www.monografias.com/trabajos12/hmguerra/hmguerra.shtml |
| Mexico: Adopting New Culture? |
| http://www.monografias.com/trabajos12/nucul/nucul.shtml |
| Ranma Manga (English only) |
| http://www.monografias.com/trabajos12/ranma/ranma.shtml |
| Fraud of the Century |
| http://www.monografias.com/trabajos12/frasi/frasi.shtml |
| Jean Michelle Basquiat |
| http://www.monografias.com/trabajos12/bbasquiat/bbasquiat.shtml |
| The Sense of Humor in Education |
| http://www.monografias.com/trabajos12/filyepes/filyepes.shtml |
| Engineering Teaching vs. Privatization |
| http://www.monografias.com/trabajos12/pedense/pedense.shtml |
| Learning process |
| http://www.monografias.com/trabajos12/pedalpro/pedalpro.shtml |
| Giovanni Sartori, Homo videns |
| http://www.monografias.com/trabajos12/pdaspec/pdaspec.shtml |
| Life: Things are known for their operations |
| http://www.monografias.com/trabajos12/lavida/lavida.shtml |
| What is Philosophy? |
| http://www.monografias.com/trabajos12/quefilo/quefilo.shtml |
| Sensitive knowledge |
| http://www.monografias.com/trabajos12/pedyantr/pedyantr.shtml |
| Comparison of authors and schools |
| http://www.monografias.com/trabajos12/pedidact/pedidact.shtml |
| Philosophy of education |
| http://www.monografias.com/trabajos12/pedfilo/pedfilo.shtml |
| Analysis of the Psychopathology of memory |
| http://www.monografias.com/trabajos12/pedpsic/pedpsic.shtml |
| Company and family |
| http://www.monografias.com/trabajos12/teoempres/teoempres.shtml |
| Philosophical Anthropology |
| http://www.monografias.com/trabajos12/wantrop/wantrop.shtml |
| Definition of Philosophy |
| http://www.monografias.com/trabajos12/wfiloso/wfiloso.shtml |
| Review of the Magna Didactic Book |
| http://www.monografias.com/trabajos12/wpedag/wpedag.shtml |
| The man before the problems and limits of Science |
| http://www.monografias.com/trabajos12/quienes/quienes.shtml |
| Review of the book Froebel. The education of man |
| http://www.monografias.com/trabajos12/introped/introped.shtml |
| Philosophical Anthropology |
| http://www.monografias.com/trabajos12/antrofil/antrofil.shtml |
| Technical calculation report |
| http://www.monografias.com/trabajos12/electil/electil.shtml |
| Calculation memory |
| http://www.monografias.com/trabajos12/elplane/elplane.shtml |
