They can be defined as a segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say that only the variable costs are those that must form part of the cost.
Fixed costs should be considered as results of the period in which they are incurred.
FIXED COSTS.
They are those committed, programmed or planned costs that are incurred to provide and maintain the production and sale capacity of the company.
DIRECT COST is also called VARIABLE OR MARGINAL COST.
Main goal:
Provide information about the relationship:
COST >>>>> VOLUME >>>>> UTILITY If you have a budget
CHARACTERISTICS OF DIRECT COSTING.
- All company, production, distribution, administration and financing costs are divided into 2 groups. In Fixed and in variables. This primary classification in terms of cost variability is taken to their respective accounts and does not limit the obtaining of statistical data. Only the variable costs of production are incorporated into the cost of the unit produced. of production is the one used to value inventories of raw material, in process, of finished articles and to quantify the cost of sales. All fixed costs are taken directly to the results of the year in which they originate because they are in function The direct costing technique can be applied to known cost systems (historical, predetermined, simple or standard).In direct costing, the variable cost applied to the product is not a function of time.
STRUCTURE BETWEEN THE INTERDEPENDENCE OF THE RELATION COST VOLUME UTILITY.
The structure of the relation cost volume utility is the mathematical technique in the study of the behavior of costs that is based on a careful segregation of costs according to their variability.
The static assumptions on which the analysis of this interdependence rests are the following:
- All costs can be classified as direct costs or periodic costs. Variable costs change directly with volume. Period costs will not change during coverage of manufacturing capacity. Cost behavior will be linear and direct costs will change in direct proportion to changes in volume. Product units and sales prices are homogeneous. There is no considerable difference between production and sale in the period being analyzed.
FIXED COSTS.
This cost in a given period of time and the duration of the activity, this cost is called "relevant duration" does not change in total, but becomes progressively smaller on a per unit basis as the volume grows and will be progressively of greater amount in relation to the unit, if the aforementioned activities decrease.
In other words, these costs are fixed in relation to their amount in pesos and variable in relation to the unit from which it follows that the fixed costs are a consequence of the long-term decisions of management.
In cost-effectiveness relationships and in the effect of patterns on the behavior of costs on decision-making, it is useful for precisely making administrative decisions.
The cost-utility volume analysis determines the volume to be set as the objective, that is, the volume necessary to achieve the desired operating income, one of the most widely used forms in the cost-volume-profit analysis is the calculation of the equilibrium point of a company.
BALANCE POINT CALCULATION.
The break-even point is found in that sales volume in which there is neither profit nor loss.
The analysis of the break-even point requires a study of the behavior of the firm's fixed and variable costs.
| INFORMATION
COST-VOLUME-PROFIT |
Impact on cost changes.
Impact on income changes. Impact on volume changes. Impact on product mix on profits. |
As machines replace workers and factories increase their level of automation, many previously variable costs become fixed, such that:
| UNDERSTANDING THE BEHAVIOR OF COSTS | Decision making.
Price fixing. Acceptance or rejection of sales orders. Analysis of cost reduction. Promotion of product lines. |
CONTRIBUTION MARGIN.
Contribution margin : represents sales in pesos less all the variable production costs that cover the fixed costs and that produce a profit.
| $ 10 | Sale by unit |
| - $ 4 | Variable costs |
| $ 6 | Contribution margin. |
Variable costs are those that vary directly with the production volume.
The fixed costs remain the same in total for a period and a production level, in this context the costs refer to the EXPIRING costs and therefore, they become EXPENSES in the period in question.
| $ 36000 fixed costs | 6000 units balance point | |
| $ 6 contribution margin | ||
| 6000 units * $ 10 | = $ 60,000 which is what the cost is being recovered |
BALANCE POINT GRAPH.
Schematically describes the cost-volume ratio and profits and shows the profits or losses that will occur in any sales volume within a relevant range. An equilibrium point graph can better indicate the COST-VOLUME-PROFIT relationship to online managers, as it vividly shows the effect of volume on costs and profits.
An equilibrium point graph expresses income, costs, and disbursements on the vertical axis.
On the horizontal axis indicates the volume, which can be represented by sales units, machine hours, direct labor, the percentage of capacity or other useful indicators to express the volume
Break-even point graph
COSTS FOR PROCESSES AND FOR PRODUCTION ORDERS.
| IN ATTENTION TO THE INCURRED ELEMENTS | IN ATTENTION TO THE TIME OF OBTAINING THE COSTS AND THE DEGREE OF CONTROL | IN ATTENTION TO THE FUNCTION THAT CORRESPOND. | IN ATTENTION TO THE LOTIFICATION AND THE CONTINUITY OF PRODUCTION. |
| ABSORBING COSTS | A) HISTORICAL, REAL OR INCURRED.
B) PARTIALLY DEFAULT |
A) PRODUCTION | 1.- PRODUCTION ORDERS.
2.- PROCESS |
| DIRECT OR MARGINAL COSTS | C) ESTIMATED OR BUDGETED COSTS
STANDARD COSTS a) PARTIAL b) COMPREHENSIVE c) MIXED |
B) OF DISTRIBUTION.
OF ADMINISTRATION. OF FINANCING. |
PRODUCTION ORDER SYSTEM.
This system collects costs for each order or lot physically.
Identifiable as they pass through the plant's production centers.
This accounting system of costs is applied in cases where production basically depends on the orders or orders made by customers.
Under these conditions there are 2 control documents.
- The order that carries a progressive number with the indications and specifications of the type of work to be carried out. For each production order, a record will be opened in the so-called cost sheet that will summarize the 3 elements of the cost of production referring to the units. manufactured from a given order.
PROCESS COST SYSTEM.
Through this system, all production costs are gathered during an accounting period and these costs are subsequently distributed among the number of units manufactured during said period, applied in those companies with intermittent, that is, constant, production where production does not it depends precisely on an order.
Example: the production of purified water, cigarettes or the pharmaceutical industry.
The determination and recording of costs is made until the time that production has concluded for this reason are called HISTORICAL COSTS.
THE SYSTEM BY PRODUCTION ORDERS
It is implemented in those industries where production is unitary, that is, the articles are produced by specific batches.
MAJOR ACCOUNTS OF THIS SYSTEM
| RAW MATERIAL WAREHOUSE | |
| They are charged: For the initial inventory at cost price | They are paid: For the cost of the direct raw material used in production. |
| For purchases at cost price. | For the cost of indirect raw material. |
| PRODUCTION IN PROCESS | |
| They are charged: For the cost of the direct raw material consumed. | They are paid: For the cost of the production of finished orders in the period |
| For the direct wages used. | |
| Default ICs. | |
| DEBT BALANCE: FOR THE COST OF MANUFACTURING PROCESS ORDERS |
| WAREHOUSE OF FINISHED ITEMS | |
| They are charged: For the cost of the orders completed in the period. | They are paid: For the cost of finished orders sold in the period. |
| WORKFORCE | |
| They are charged: For the amount of labor paid in production. | They are paid: For the application of direct and indirect labor in production. |
| SALES COST | |
| They are charged: For the cost of finished orders sold in the period. | They are paid: Debt balance that is transferred at the end of the year to profit and loss. |
| APPLIED CI | |
| They are charged: For the credit balance it is transferred to low or over absorbed indirect charges. | Subscribed: Apply default CIs to production |
| LOW OR OVER ABSORBED CI | |
| They are charged: For the transfer of the real indirect charges. | Subscribed: Transfer of applied ICs |
| INCURRED CI | |
| They are charged: For the accumulation of all the real CIs of the period. | They are paid: Transfer to low or over absorbed IC. |
| IF YOU ARE A DEBTOR, IT REPRESENTS A LOW ABSORPTION OF CI | IF YOU ARE A CREDITOR, IT REPRESENTS AN OVER-ABSORPTION OF CI |
