Cost concept
Economically, cost is understood as: The sum of effort and resources that must be invested to produce an item or cost is what is displaced or sacrificed to obtain the chosen product.
The meaning of the term cost has several meanings, but we will explain the two basic ones that are:
- Investment cost (accounting-financial). That expresses technical factors of production for accounting registration purposes. Replacement cost or economic displacement. It represents the possible economic consequences for the purposes of alternative selection and for profit planning.
Examples of investment cost and replacement costs:
- "His exam cost him three days of study", it means that he spent three days to present it. "His exam cost him not to go on the excursion", it means that the price of the exam was the sacrifice of fun.
The cost of investment in manufacturing aspect, expresses the technical and intellectual factors of production, the cost of substitution manifests the consequences obtained by the chosen alternative.
Classification of costs
The costs can be classified from different approaches, however from the accounting point of view they are:
| Criterion |
Types |
|
| In attention to the moment in which they are obtained. | Actual or historical costs | Default costs
|
| In attention to the elements included in the unit cost. | Absorbent or traditional costs. | Variable, direct or marginal costs. |
| In attention to its function within the company. |
|
|
| As for the way they are incurred. | Relevant costs | Non-relevant costs |
| In attention to its degree of variability. |
|
|
| In attention to the manufacturing nature of the company |
|
|
| In attention to the economic approach. |
|
Costs in ancient times were seen as the determination only of inventory, now it is taken into account for decision-making.
Main areas of company accounting
Cost accounting
Cost Accounting is a phase of the accounting procedure whereby details of material costs, labor, and indirect charges are recorded, summarized, analyzed, and interpreted which are the non-production costs required to produce and sell a Article.
Cost accounting is interested in obtaining a figure that represents the cost of a manufactured product. The most important reasons why the management of the industrial company needs to know the costs of a product are:
- Valuing inventories Making sales decisions for a product Cost control
The cost accountant is responsible for adding value to cost issues, making decisions based on cost analysis.
Cost accounting identifies, measures, defines, and analyzes cost elements.
Cost elements
- Raw material Workmanship Indirect charges
Essential objectives of cost accounting
- Provide reports related to costs to determine results and value inventories. Provide information to exercise administrative control of the operations and activities of a company. Provides information that serves as a basis for management for planning and decision-making.
Cost accounting features
- It is a branch of general accounting. Obtaining information regarding the unit cost of product or batch of items. Cost analysis in order to obtain detailed information to the executives of the company. Control of the 3 cost elements to produce a Article. Primary Purpose of Cost Accounting - Records, classifies, summarizes, and presents only the past or future operations necessary to determine what it costs to acquire, operate, produce, and sell an item or service.
Objectives. Significant mention of the results.
The measurement of the periodic profit of an exercise is the excess of income realized in that period over the costs involved incurred to produce those income.
Profit = Sales - Production cost - Non-production costs
Costs: They are the monetary measure of the value of inventories of production in process and finished items.
An industrial company runs three types of warehouses:
- Of raw materials. Of production in process. Of finished articles.
Cost control: The production performance of an item is judged on the basis of its results and income (income-cost)
Pricing policy: The managerial criterion to be followed in the pricing policy is to achieve REASONABLE PROFIT, or the satisfactory recovery of the investments that must be obtained during operations and that you will have to strive to achieve.
For example: we could establish the policy, with a profit of around 50 to 60%.
Characteristics and functions of the transformation industry
It consists of processing various raw materials and transforming them into finished products.
The manufacturing process consists of a situation of INPUT CURRENT which is the raw material used in the elaboration of a product and a potential of OUTPUT CURRENT which is the finished product.
Functions of the transformation industry
- Purchase function. Acquire the raw materials necessary for production. Production function. It is the responsibility to transform raw materials and materials into finished products. Distribution function. It assumes responsibility for packaging finished items, filling customer orders, and continues until sales are charged.
Activities of the Transformation Industry
- Acquisition of raw materials.Requisition of raw materials.Allocation of labor.Incurrence of indirect production charges.Application of indirect production charges.Finishing of products.
Departments with which the Cost Accountant has interaction
- Marketing: is the one that develops the sales projects, together with the cost accountant, determines the sale price of the products. Engineering: they convert the specifications of the new products into estimated costs, which implies deciding what will be sold and then managing the costs so that the desired profit margin is achieved. Manufacturing: they work closely with the production area to measure and report manufacturing costs. System Design: Ideally, cost accountants, engineers, and system designers develop a flexible production process that responds to changing market needs. Treasury:Together with the treasurer, cash and working capital requirements are forecast. The reports indicate the time when there will be excesses that can be invested. Financial accounting: They will use cost information to value inventory. Personnel: Administers salary tabs, payment methods, and compensation to each employee, this department maintains adequate records of labor for legal purposes on file.
Total Quality Management
- Quality: It is to provide customers with products and services that consistently satisfy their needs and expectations. Total Quality: it is a process of continuous improvement aimed at full customer satisfaction. Total quality management: It consists of eliminating waste.Waste: any amount that goes beyond the minimum amounts allocated to labor, machinery, materials and facilities. Zero Defects: it is doing things right the first time.
Organization of cost accounting
- Commercial companies: they only have one warehouse, for finished products articles. Manufacturing companies: it has 3 warehouses, the one for articles in process, the one for raw materials, and the one for finished articles.
- Raw Materials Warehouse - Displays the cost of materials available for processing Production in Process Warehouse - displays the cost of goods pending completion Finished Goods Warehouse - displays the cost of goods whose production has already been completed.
Warehouse Examples:
COMMERCIAL:
WWWW CO.
STATE OF FINANCIAL POSITION.
AS OF DECEMBER 31, 2000.
ACTIVE.
Circulating.
| Cash | 20000 |
| Accounts receivable | 75000 |
| Warehouse of goods | 183000 |
| Total current assets | 278000 |
MANUFACTURER.
WWWW MANUFACTURERA CO.
STATE OF FINANCIAL POSITION.
AS OF DECEMBER 31, 2000.
ACTIVE.
Circulating.
| Cash | 20000 |
| Accounts receivable | 75000 |
| Raw materials warehouse. 32000 | |
| Finished goods warehouse 37000 | |
| Finished goods warehouse 114000 | 183000 |
| Total current assets | 278000 |
Direct Raw Material:
It is any raw material that becomes an identifiable part of the finished product.
| Concept | Should | To have |
| Raw material warehouse | 10 | |
| Banks | 10 | |
| = Registration of raw material purchase | ||
| Raw material (production in process) | 10 | |
| Raw material warehouse | 10 | |
| = Record of raw material consumption |
Direct labor:
They are the wages earned by workers who transform the material from its natural state to become a finished product.
| Concept | Should | To have |
| Labor (production in process) | 10 | |
| Banks | 10 | |
| = Registration of labor payment. |
Indirect charges or indirect costs:
They include all the production costs of indirect materials and indirect construction materials, for example: rent, taxes, insurance, depreciation, electricity, heating, vacation payments, holidays, amortizations, etc.
STATE COST FORMULAS FOR MANUFACTURED ITEMS.
INITIAL BALANCE OF THE DIRECT RAW MATERIAL WAREHOUSE.
+ NET PURCHASES OF MATERIALS.
= DIRECT MATERIALS OR DIRECT RAW MATERIAL AVAILABLE FOR USE.
DIRECT RAW MATERIAL AVAILABLE FOR USE.
–FINAL BALANCE OF THE RAW MATERIALS STORE.
= RAW MATERIAL AVAILABLE USED.
DIRECT RAW MATERIAL USED.
+ DIRECT LABOR
+ INDIRECT FACTORY COSTS.
= TOTAL PRODUCTION COSTS FOR THE PERIOD.
TOTAL PRODUCTION COST FOR THE PERIOD.
+ INITIAL BALANCE OF PRODUCTION IN PROCESS.
= COST OF PRODUCTION AVAILABLE TO BE TRANSFORMED.
PRODUCTION COST AVAILABLE.
-FINAL SALE OF PRODUCTION IN PROCESS.
= COST OF MANUFACTURED ITEMS.
FORMULAS FOR THE INCOME STATEMENT.
INITIAL INVENTORY OF FINISHED PRODUCTS.
+ COST OF FINISHED PRODUCTS or + PURCHASES.
= COST OF PRODUCTS AVAILABLE FOR SALE.
COST OF PRODUCTS AVAILABLE FOR SALE.
-FINAL INVENTORY OF FINISHED PRODUCTS.
= COST OF PRODUCTS SOLD.
NET SALES
-COST OF THE PRODUCTS SOLD.
= GROSS PROFIT.
GROSS PROFIT
-OPERATING COSTS.
= NET INCOME.
ACCOUNTING OF RETAIL SELLERS.
INVENTORY OF MERCHENDISE.
INITIAL INVENTORY.
+ NET PURCHASES.
= AVAILABLE FOR SALE
-FINAL INVENTORY
= COST OF PRODUCTS SOLD.
MANUFACTURING COMPANY ACCOUNTING (INEVNTARIO E RAW MATERIAL)
INITIAL INVENTORY
+ NET PURCHASES OF MATERIALS
= AVAILABLE TO USE
-FINAL INVENTORY
= RAW MATERIAL USED
MANUFACTURING COMPANY ACCOUNTING (INV. OF PRODUCTS IN PROCESS)
INITIAL INVENTORY
+ COST OF DIRECT MATERIAL.
FROM DIRECT LABOR.
OF INDIRECT CHARGES
= COST OF PRODUCTION IN PROCESS.
-FINAL INVENTORY
= COST OF FINISHED PRODUCTS.
ACCOUNTING OF MANUFACTURING COMPANIES (INV. OF FINISHED PRODUCTS)
INITIAL INVENTORY
+ COST OF FINISHED PRODUCTS.
= AVAILABLE FOR SALE
-FINAL INVENTORY
= COST OF PRODUCTS SOLD.
Determination of factory IQ rates
Machine hours.
CI / estimated machine hours.
When machine hours are used as the basis for applying indirect charges, this may not be the factor or the cost generated. If a large number of factory overhead costs are related to labor, the most accurate basis for application will be direct labor hours.
Direct raw material:
CI / material costs for the estimation period.
Direct raw material is an appropriate basis when there is a logical relationship between consumption of direct materials or direct raw material and indirect costs.
Production units.
CI / production units in the period (estimate)
Companies that manufacture only one product or have a simple production process use production units as a basis.
Direct labor.
CI / direct labor costs (estimate)
When the cost of direct labor is used as the basis for the application of indirect costs, we assume that higher-paid workers have a more significant share of indirect costs than lower-paid workers.
Hours of direct labor.
If many of the indirect costs are related to the use of direct labor as is the case in many manufacturing environments, direct labor hours are the appropriate basis.
CI / estimated labor hours.
Plant capacity
Idle capacity.
It is the temporary lack of use of the facilities that results from a decrease in demand for the company's products or services.
Excessive capacity.
It refers to installations that are simply not necessary, the capacity selected depends on whether the administration uses a short or long-term point of view and sees how many forecasts it wants to make for possible interruptions in volume.
Theoretical Capacity = maximum or ideal capacity.
It assumes that all personnel and equipment operate at maximum efficiency, using 100% of the plant's capacity, the theoretical capacity is IRREAL, it does not include normal interruptions resulting from breakdowns or maintenance of the machines. Thus, accountants generally do not consider theoretical capacity as a feasible basis for determining cost application rates, however administrators use theoretical capacity as an auxiliary instrument to measure the efficiency of operations, thereby providing ideal figures for Make comparisons.
WAIT 100%
Practical ability.
This production volume occurs when the demand for the products causes the plant to operate continuously, it represents the maximum production at which all manufacturing departments can operate efficiently so that the costs of unused capacity are not assigned to the products., practical ability is more realistic than theoretical ability.
EXPECT 80 OR 90%
Normal capacity.
It includes the consideration of idle time as inefficiencies in personnel and equipment is a more appropriate basis for applying indirect costs under most circumstances.
NORMAL CAPACITY: IT IS THE IDEAL ACCOUNTINGLY.
Real Expected Capacity.
It is the volume of production that is needed to satisfy the sales demands of the following year. If the actual expected level of activities is used as the basis for the application of the indirect factory costs, the fixed unit costs will decrease in the peak periods of production, under these conditions the sale price of these units will be lower, in a contract which will imply additional costs than when the units are manufactured in a period of activity.
Capacity level.
| Concept | Theoretical Capacity | Practical Capacity | Normal capacity. | Real Expected Capacity. |
| Machine hours | 100% | 85% | 75% | 60% |
| Indirect manufacturing costs Dear | 6000 | 5100 | 4500 | 3600 |
| Variable indirect costs at $ 16.50 per machine hour | 99000 | 84150 | 74250 | 59400 |
| Fixed CI | 87750 | 87750 | 87750 | 87750 |
| Total c. Indirect | 186750 | 171900 | 162000 | 147150 |
| Total IC of fab. Per machine hour | ||||
| Variable CIs | 16.50 | 16.50 | 16.50 | 16.50 |
| Fixed ICs | 14.63 | 17.20 | 19.50 | 24.38 |
| Total CI | 31.13 | 33.70 | 36 | 40.88 |
Control of materials.
Objectives of the company's materials management:
Acquisition of materials.
Purchase prices.
Exercise efficient internal control.
Minimize waste and theft of materials.
Acquisition of materials: it is required to buy the optimal quantities and in the time necessary to obtain the necessary equipment.
No more than necessary, so as not to keep the material idle.
Not less than necessary.
Purchase prices: through the purchasing department, which should be well organized, evaluating volume acquisition alternatives, cash payment, and discounts or benefits on term payments.
Exercise efficient internal control: establish standards and control records in purchasing departments, warehouses, production centers and accounting.
Supplier quote request.
Request for quotation of materials.
Order or purchase order.
Warehouse entry note.
Stock note or card.
Note or exit value from the warehouse.
Materials return note.
Material waste note.
Defective material note.
Physical inventory card.
Coding of materials: if we assign a number to an article or material, we save time and protect formulas.
Simple consecutive number system.
It consists of assigning a consecutive number to each material starting with number 1 without any other special grouping by type of material.
Example: 1 Sandal. 2 High-heeled shoe.
Combined or group number system.
The numbering of the materials is done in the same way as the previous system but putting the number corresponding to its group before it.
Example: Group 1: Screws.
¾ = 1 screw (group). 2 (subgroup)
Decimal or progressive number system.
It is a numbering system whose purpose is to know through the group its classification and its sub classification within which the material belongs.
Group: 5 (Screws).
Rating: 2 (3/4).
Subclassification: 1 (length 2 cm)
Alphanumeric system.
Alphabetical numbers and symbols are used together according to the magnitude of the inventory.
Coded alphanumeric system.
A) Numbering of materials by alphabet letters and in consecutive numerical sequence. Example: A.1 tornillos screws, b.1 Nails 1cm
B) Numbering of materials by sections of the letters of the names in consecutive alphabetical and numerical sequence. Example: T: screws, C: nails
C) Numbering of materials by letters of the alphabet and in numerical progression with a power range of two. Example T. 1 2
D) Numbering of materials by sections of the letters of the names in alphabetical sequence and numerical progression with power margins of 2
E) Mnemonumeric System: it is the result of a combination of a numerical system with an alphabetical system in which the letters are used to identify the divisions, subdivisions themselves, the general characteristics of the material and numbers destined for more specific classifications.
Example: T (screws)
.1 tornillos screws
.a steel
.1 in length 1 cm.
Material consumption budget.
The Production Manager must estimate the consumption of raw materials that is necessary to satisfy the production level of the plant.
It has the following objectives:
Determining the optimal stocks of raw materials to satisfy the production schedule.
Provide the purchasing department with the timely acquisition of materials.
To incur the minimum investment in the warehouse of raw materials.
Inform finance management to make the necessary payments derived from the acquisition of materials.
Contribute to the timely delivery of customer orders.
The content of this budget covers the following:
Key.
Article.
Unit.
Detail of consumption for the period.
Average routes of inventory.
Purpose: to show what materials will be needed.
Raw material purchase budget.
The purchasing budget is calculated based on the resulting consumption in the production budgets.
Budgeted purchases: total raw materials to enter the raw materials warehouse each month and not for the production orders placed.
The purchasing budget chart should include the following:
Key.
Article name.
Unit.
Unit price.
Purchase detail of the period.
Total for the period.
Payment conditions.
In calculating the economic magnitude of the purchase order there are 2 dangers that must be avoided:
That of insufficient inventories that disrupt production and cause losses of items to sell.
The one of excessive inventories that originate investments and unnecessary additional costs and risks of obsolescence of materials.
In practice, several factors must be taken into account before deciding on the most appropriate procedure in the valuation of the materials used.
Type of products manufactured.
Cost system used
Material replacement policy.
Stock time normally available.
Storage forms.
Need to control the performance of certain materials.
Degree of inflation suffered by the national economy.
Official price control.
Market situation of the company.
What kind of costs are going to be used:
Direct, indirect, marginal, historical, standard costs.
Inventories.
Waste: (tangible)
Represents the waste that materials undergo during their transformation.
Damaged materials: they are materials that result in defects or failures due to an accident or due to the action of material elements, but they can be corrected but this implies an additional cost.
Waste: (intangible)
Some materials suffer evaporation and weight loss by the mere fact of being stored for a long time, this decrease in the amount of raw material can not always be accurately measured constituting the waste.
Accounting treatment of warehouse differences.
When waste and waste are considered normal.
| Concept | Should | To have |
| Indirect charges | xxx | |
| Raw materials warehouse | xxx | |
When a provision is established for waste and variations in the warehouse for a previously fixed amount:
| Concept | Should | To have |
| Indirect charges | xxx | |
| Provision for variations and waste. | xxx | |
When the waste has a recovery value per sale.
| Concept | Should | To have |
| Waste warehouse | xxx | |
| Raw material warehouse | xxx | |
When the differences found are considered an extraordinary loss.
| Concept | Should | To have |
| Extraordinary Loss | xxx | |
| Raw materials warehouse | xxx | |
When it comes to establishing responsibilities.
| Concept | Should | To have |
| Various debtors | xxx | |
| Raw materials warehouse | xxx | |
In some cases, when applying the differences, it is not possible to affect the cost of production due to adjustment difficulties in the production itself:
| Concept | Should | To have |
| Sales cost | xxx | |
| Raw materials warehouse | xxx | |
Cost examination.
What is cost accounting?
What are the costs?
What is an investment cost?
What is an opportunity cost?
What is a replacement cost?
What are the cost targets?
What are the elements of cost?
What are the objectives of cost accounting?
What are the characteristics of cost accounting?
Mention and graph the main areas of accounting in the company.
What are the departments that have to do with the cost area?
What is the production function?
How is the production system, inputs and outputs?
How is the purchasing function?
How is the production function?
How is the distribution function?
What are the activities of the transformation industry?
What is a budget?
What is quality?
What is total quality?
What is total quality management?
What is the concept of zero defects?
How many warehouses have:
The trading company:
The service company.
The manufacturing company.
What is direct raw material?
What is direct labor?
What are indirect charges?
What are the capacities of the plant and does each one describe it?
Materials Control, what are the objectives of materials management?
Do you mention some of the documents used for internal control?
Types of numbering systems.
What is the material consumption budget and how is it formed?
What is the budget for materials purchases and how is it formed?
What is a waste?
What is a waste?
What is a damaged material and what does it involve?
Finally, by following the video course you find below (9 videos, 10 hours), from the Private Technical University of Loja, you can expand your knowledge in cost accounting.
Download the original file
