Estimated costs represent only an attempt to anticipate actual costs and are subject to correction as compared to them.
This system consists of:
- Predetermining unit costs of production by estimating the value of direct raw material, direct labor and indirect charges that are considered should be obtained in the future, subsequently comparing the estimated costs with the real ones and adjusting the corresponding variations. a predetermined cost system taking into account the experience of previous exercises.
Indicates what it may cost to produce an item, for which reason said cost will be adjusted to the historical or actual cost.
From the comparison there are discrepancies between the estimated and the real known by the name of variations, which will be a wake-up call that forces us to study the reason for the difference.
The probable calculation of the cost of a unit to produce:
- Technical.- indicates the consumption required to obtain a product and serves as the basis for the accounting estimate. Accounting.- valuation and proper record of consumption determined in technical estimates.
FUNDAMENTAL CHARACTERISTICS OF THE ESTIMATED COST SYSTEM.
- The estimated costs are obtained BEFORE starting the manufacturing and DURING its transformation. They are based on predetermined calculations on previous statistics and a broad knowledge of the industry in question. To obtain them, it is essential to consider a certain volume of production and determine the unit cost. When comparing the reals with the estimates, they should always be adjusted to the real, adjusting at this time to variations. The estimated cost indicates what an item “CAN” cost. The estimated costs are aimed at:
- Contribute to set sales prices in advance. Serve as a preventive and internal control instrument. Help in managerial decision-making. Determine quotes. Evaluate the cost-effectiveness of producing an item.
ADVANTAGES OF THE ESTIMATED COST SYSTEM.
- The costs of the materials and the operations are known separately, thus knowing the alterations that occur. It facilitates having reliable estimates when the design of a product or the manufacturing method is changed. Its study leads to efficient costs. prior to production leads to the adoption of correct rules in the purchasing, production and distribution functions. They are used as a transitional step to arrive at the development of a more complete cost system. In other words, to arrive at the preparation of the estimated cost sheet.
ESTIMATED COST SHEET.
To implement an estimated cost system, the following steps must be followed:
- Obtaining the unit estimated cost sheet. The valuation of the finished production at estimated cost. The valuation of the production sold at estimated cost. The valuation of the final inventory of production in process at estimated cost. The determination of the existing variations, its study and its elimination. The correction to the unit cost estimate sheet.
The estimated cost sheet based on past experiences should calculate:
- The quantity and value of the materials required for the production volume. The time set for the production volume. In relation to the production volume and the fixed time, the amount of factory wages and salaries is predetermined. Above, indirect production charges are calculated.
To prepare the estimated cost sheet, a number of aspects must be considered:
- Previous studies and analysis of the article project.
- Time to develop it, data to carry it out such as:
- Separation of operations Separation of cost elements Separation of parts Costs by class, size, weight, etc.
- Time to develop it, data to carry it out such as:
- Approximate volume of the intended production. Production capacity of the company. Studies, research and market strategies. Sources of financing.
- Auxiliary elements. Predetermination of the direct materials included in each product.
- In price.
- Market research Adequate acquisitions to reduce costs.
- The predetermination of direct wages and salaries (outline the operations to be carried out).
- In quantity. Production project. Study of productive operations. Degree of qualification or specialization required. Salary studies. Study of methods within the study of wages. Measurements of wages.
- Tables according to according to the economic zone. Conditions of the collective work contract. Benefits to workers. Predetermination of indirect charges. (Fixed, variable and semivariable).
- Establish quotas according to production capacity, budget for indirect charges, production volume, technical relations, graphs, statistics, etc.
- Tables according to according to the economic zone. Conditions of the collective work contract. Benefits to workers. Predetermination of indirect charges. (Fixed, variable and semivariable).
- In quantity.
- Production project. Study of productive operations. Degree of qualification or specialization required. Study of wages.
- Auxiliary elements.
- Previous Estimated Cost Sheets. Subject Repetitive Items or Modifications. Previous Records, Comparison, and Final Cost Check.
THE ACCOUNTING MECHANICS.
| In-process production inventory. | |
| It loads: | You pay: |
| 1. - For the final production inventory of the previous year, at adjusted estimated cost. | 3. - For the estimated cost. |
| 2. - The final inventory of production in process at adjusted estimated cost. |
| Raw material in process | |
| It loads: | You pay: |
| 1. - For the initial inventory at estimated cost. | 1. - For the estimated production at estimated cost. |
| 2. - For the costs incurred at real cost. | 2.-For the final inventory at adjusted estimated cost. |
Balance: it will be the variation between the estimated and real costs, if the balance is debtor it is unfavorable, if it is balance it is creditor it is favorable.
| Workforce in process. | |
| It loads: | You pay: |
| 1. -By the initial inventory of the estimated cost. | 3. - For the finished production at estimated cost. |
| 2. - For the cost incurred at real cost. | 4. - For the final inventory at adjusted estimated cost. |
The balance is a variation between estimated and actual costs.
| Indirect charges in process | |
| It loads: | You pay: |
| 1. - For the initial inventory of the estimated cost. | 3. - For the finished production at estimated cost. |
| 2. - For the cost incurred at real cost. | 4. - For the final inventory at adjusted estimated cost. |
The balance is the variation between estimated and actual costs.
| Raw materials warehouse. | |
| It loads: | You pay: |
| 1. - For my real cost. | For my actual cost. |
| Workforce. | |
| It loads: | You pay: |
| 1. - For my accumulation at real cost. | 2. - at real cost. |
| Indirect charges. | |
| It loads: | You pay: |
| 1. - For my accumulation at real cost. | 2. - At real cost. |
| Warehouse of finished articles. | |
| It loads: | You pay: |
| 1. - For the finished production at estimated cost. | 1. - For the production sold at estimated cost. |
| Sales cost. | |
| It loads: | You pay: |
| 1. - For the production sold at estimated cost. |
The main ways of accounting for variations are:
- Through cost of sales. Through an income account called estimated cost variations. Take it against various debtors. Take it to the inventory account of production in process. Apply the variations by affecting the finished products warehouse and the cost of sales not including the production in process. Distribute them by means of a rectifying coefficient in order to correct and adjust the estimated cost sheet.
- Cost of sales. Warehouse of finished items. Production in process.
FORMULA FOR THE RECTIFIER COEFFICIENT.
CR = AMOUNT OF VARIATION
PROD. FINISHED AT ESTIMATED COST + IFPP AT ESTIMATED COST
Estimated cost sheet:
| Concept | cost | ||||
| Raw material | Unitary | ||||
| Material A | 20 k. | TO | $ 3 | $ 60 | |
| Material B | 10 k. | TO | $ 18 | $ 150 | 210 |
Workforce.
| Concept | |||||
| Operation X | 50 h. | TO | $ 1 | $ 50 | |
| Operation Y | 4 h. | TO | $ 30 | $ 120 | |
| Operation Z | 7 h. | TO | $ 10 | $ 70 | $ 240 |
| 61 h. |
Indirect charges.
| Concept | |||||
| Share | $ 305/61 h. | = | $ 5 | $ 305 | |
| ($ 5 application fee) | $ 755 Estimated Cost Per Unit | ||||
Practical case # 1.
Compañía Licuadoras Modernas, SA works with an estimated cost system and begins the month of July with the following movements.
| Accounts | Should | To have |
| Banks | $ 79,750.00 | |
| Raw materials warehouse | $ 125,000.00 | |
| In-process production inventory. | $ 3,093.75 | |
| Machinery equipment | $ 180,000.00 | |
| Warehouse of finished articles. | ($ 111,000.00) | |
| Installation costs. | $ 180,000.00 | |
| Providers | $ 80,593.75 | |
| Social capital | $ 500,000.00 | |
| $ 580,593.75 | $ 580,593.75 |
- The estimated cost sheet for your imperial model that you currently manufacture is as follows:
| Concept | Estimated unit cost |
| Raw Materials | $ 75.00 |
| Labor 5 h. * $ 6.50 | $ 32.50 |
| C. Indirect 5 h. * $ 3.75 | $ 16.25 |
| Total estimated cost | $ 123.75 |
- The initial inventory of production in process is made up of 50 units of the imperial model at 50% finished in its three cost elements. The warehouse balance of finished items consists of 1000 blenders valued at the estimated cost of $ 123.75
(1000 * 123.75 = 123750)
- During the month of June the following operations are carried out.
1.- Raw materials are purchased for $ 50,000.00
2.- According to the warehouse requisitions, the amount of direct raw materials delivered to production was $ 70,090.00 and the amount of indirect materials was $ 2,000.00.
3.- The amount of the monthly payroll was $ 32, 955.00
4.- According to the time cards, the distribution of wages was as follows:
| Direct wages. | $ 28,380.00 |
| Indirect wages. | $ 4, 575.00 |
| $ 32, 955.00 |
5.- The amount of certain indirect manufacturing expenditures was $ 7,835.
6.- The depreciation of manufacturing machinery and equipment is 10% per year.
7.- The real indirect charges of the month are applied to the production of the period.
8.- Production finished in the month was 850 blenders.
9.- At the end of the month, the final inventory of imperial model blenders was 70 units at 50% advance in the 3 cost elements.
10.- During the month 1500 blenders are sold at $ 275 each in cash.
11.- The amount of distribution costs was as follows:
| Distribution Cost | $ 20,000 |
| Administration Costs | $ 30,000 |
| Financing Costs | $ 10,000 |
| $ 60,000 |
12.- The provision for income taxes is $ 65,000.00
It is requested:
Register the operations in major schemes until accounting for the month's variations, using for this effect the rectifying coefficient of each element of the cost.
Correct the unit cost estimate sheet that will be used for the following month.
CEDULAS:
IDENTIFICATION I. Initial Inventory Valuation Production in process at estimated cost.
| By item. | Units | Equivalent Units. | Estimated Unit Cost. | Total Estimated Costs. |
CERTIFICATE II.- Valuation of finished production at estimated cost.
| By item. | Units | Estimated Unit Cost. | Total Estimated Costs. |
ID card III.- Valuation of production in process at estimated cost.
| By item. | Units | Equivalent Units. | Estimated Unit Cost. | Total Estimated Costs. |
SCHEDULE IV.- Determination of the rectifying coefficient of each element:
IDENTIFICATION V.- Correction to the IFPP.
| By item. | Final inventory | CR | Adjustment |
CÉDULA VI.- Determination of the correction to profuction finished of the month sold.
| By item | Sales cost | CR | Adjustment |
PEPS (SCHEDULE VI)
| UNITS IN STOCK | |
| (-) SOLD UNITS | |
| (=) FINISHED PRODUCTION UNITS SOLD |
PEPS (SCHEDULE VI)
| FINISHED UNITS | |
| (-) FINISHED UNITS SOLD | |
| (=) UNITS FINISHED IN STOCK |
ID card VII.-
| ELEMENT | PROD. Finished | CR | ADJUSTMENT |
SCHEDULE VIII.- Correction to the unit cost estimate sheet.
| ELEMENT | ESTIMATED UNIT COST | CR | ADJUSTMENT | ESTIMATED UNIT COST
(NEXT MONTH) |
STATEMENT OF INCOME.
FROM JANUARY 01 TO DEL.
| SALES | ||
| (-) SALES COST | ||
| (=) GROSS PROFIT | ||
| (-) OPERATING COSTS | ||
| FINANCIAL EXPENSES | ||
| ADMINISTRATION EXPENSES | ||
| DISTRIBUTION EXPENSES | ||
| (-) ISR PROVISION | ||
| (=) NET INCOME |
Practical Case # 2:
The Co. Confecciones Imperial SA de CV works fine men's suits and used estimated costs to set sales prices with production activity.
Before starting the period, the company calculates the following costs, to calculate a suit taking into account the experiences obtained in previous periods.
- Estimated cost sheet.
| Element | |
| Raw material | 400 |
| Workforce | 500 |
| Indirect charges | 300 |
| 1200 |
- For the period that begins, the Company has the following accounting records and they are:
| As of 01/01/01
Raw material |
120,000 | |
| Purchase of MP | 1,580,000 | |
| As of 01/31/01
MP inventory |
60,000 | |
| Expenses per MOD | 1,651,000 | |
| IC expenses | 1,190,000 |
- The following data is extracted from the production report obtained at the end of the month:
| UNITS STARTED | 4,000 | ||
| OF WHICH: | |||
| FINISHED UNITS | 3,000 | ||
| UNITS IN PROCESS | 1,000 | ||
| WITH THE FOLLOWING DEGREE OF PROGRESS: | |||
| MP | 100% | ||
| MO | fifty% | ||
| CI | fifty% |
- Of the units completed in the period, 2,500 were sold with a sale price of double the estimated cost for each suit.
| MATERIALS INVENTORY | 120,000 | |
| + PURCHASE OF MATERIALS | 1,580,000 | |
| AVAILABLE MATERIALS | 1,700,000 | |
| - FINAL INVENTORY OF MAT. | 60,000 | |
| = MAT. USED | 1,640,000 |
CEDULAS:
IDENTIFICATION I. Initial Inventory Valuation Production in process at estimated cost.
| By item. | Units | Equivalent Units. | Estimated Unit Cost. | Total Estimated Costs. |
CERTIFICATE II.- Valuation of finished production at estimated cost.
| By item. | Units | Estimated Unit Cost. | Total Estimated Costs. |
ID card III.- Valuation of production in process at estimated cost.
| By item. | Units | Equivalent Units. | Estimated Unit Cost. | Total Estimated Costs. |
SCHEDULE IV.- Determination of the rectifying coefficient of each element:
IDENTIFICATION V.- Correction to the IFPP.
| By item. | Final inventory | CR | Adjustment |
CÉDULA VI.- Determination of the correction to profuction finished of the month sold.
| By item | Sales cost | CR | Adjustment |
PEPS (SCHEDULE VI)
| UNITS IN STOCK | |
| (-) SOLD UNITS | |
| (=) FINISHED PRODUCTION UNITS SOLD |
PEPS (SCHEDULE VI)
| FINISHED UNITS | |
| (-) FINISHED UNITS SOLD | |
| (=) UNITS FINISHED IN STOCK |
ID card VII.-
| ELEMENT | PROD. Finished | CR | ADJUSTMENT |
SCHEDULE VIII.- Correction to the unit cost estimate sheet.
| ELEMENT | ESTIMATED UNIT COST | CR | ADJUSTMENT | ESTIMATED UNIT COST
(NEXT MONTH) |
STATEMENT OF INCOME.
FROM JANUARY 01 TO DEL.
| SALES | ||
| (-) SALES COST | ||
| (=) GROSS PROFIT | ||
| (-) OPERATING COSTS | ||
| FINANCIAL EXPENSES | ||
| ADMINISTRATION EXPENSES | ||
| DISTRIBUTION EXPENSES | ||
| (-) ISR PROVISION | ||
| (=) NET INCOME |
___________________________
To complement what has already been explained in this document, we recommend the following video-lesson given by Professor Juan Antonio Molina, from the Benemérita Universidad Autónoma de Puebla, in which he explains the topic of estimated costs, their accounting record, their correction to real costs and the production of the cost statement of production and sale, both real and estimated. (4 videos, 57 minutes)
Download the original file
