Theoretical justification of costs for its application to the process of the tobacco benefit

INTRODUCTION

The Cuban economy and the business system are not oblivious to the effects of the great changes that have occurred in the world. To face these challenges, new strategies have been drawn up, one of them is the Business Improvement process, which has the central objective of maximizing efficiency and competitiveness, results to be achieved, if accompanied by a reduction in costs. and an increase in quality.

In order to achieve this efficiency, the use of systems and mechanisms for planning, control and use of resources with a higher degree of economy is an essential condition, and in turn it is imperative to have adequate methods that allow examining and evaluating the efficiency and effectiveness in the compliance with these aspects and gain promptness and quality of the information provided for management decision-making in correspondence with the behavior of the environment and the scenarios where the organization moves.

The implantation and application of new cost systems and techniques for their analysis constitute pillars of transcendental importance in achieving these objectives, which can be considered vital for the survival of the entities and their future development.

Based on the need to search for cost improvement alternatives and their application in the Tobacco Collection and Benefit Company of Cabaiguán, we carried out this research in the RIR Cabaiguán Zonal Unit.

In the entity under analysis, there are difficulties in the absence of a theoretical foundation that in turn serves as a starting point for the implementation of techniques that allow the registration, control, calculation and analysis of costs, resulting in a poor planning and, as is to be expected, a decision-making process that, to a large extent, is not in correspondence with the real situation presented by the RIR Cabaiguán Zonal Unit.

Taking into account the raison d'être of the Tobacco Collection and Benefit Company of Cabaiguán, the need to find ways to know the costs is imposed, which would facilitate a better analysis of the situation that exists in the company, and with it better planning and decision making, which in turn would optimize its corporate purpose.

Precisely for this reason the problem situation associated with the investigation is defined as: the non-existence of the theoretical foundation for the application of techniques that allow the registration, control, calculation and analysis of costs and subsequent decision-making, associated with the areas of liability, which will affect your operating profits.

DEVELOPING

Theoretical foundation for the application of techniques of registration, control, calculation and analysis of the Cost of Benefit of Tobacco.

Conceptualization of Cost Accounting.

“Accounting was born from practice. Originally it was merely empirical and responded to the need for registration. Only later, and as the elementary generating need is being satisfied, does the process of investigation of principles and causes, characterizing science, begin, subjecting the material content possessed to systematization.

For Cañibano2, accounting is a science of an economic nature, the object of which is the past, present and future knowledge of economic reality in quantitative terms at all its organizational levels, through specific methods supported on sufficiently contrasted bases, in order to prepare information covering external financial needs and those of internal planning and control.

Financial Accounting together with Management Accounting constitute the two most important branches of Accounting, both arising from the need for specialization and fulfillment of clearly defined purposes.

Financial Accounting is primarily interested in the Financial Statements for external use by investors, creditors, financial analysts, government agencies and other interested groups.

Management Accounting is a part of accounting that aims to capture, measure, record, measure and control the internal circulation of company values, in order to provide information for making decisions about production, training internal cost price and sales price policy and analysis of results, by contrasting with the information revealed by the market of factors and products, based on the technical laws of production, the social laws of organization and the laws economic market. Management accounting not only encompasses the internal decision-making of the company, but is also used for the external analysis of the company about its behavior with respect to the competitive environment.

Cost accounting is a branch of management accounting that is primarily related to the accumulation and analysis of cost information for internal use by managers, in inventory valuation, planning, control and taking of decisions (Figure 1). It is also the one that synthesizes and records the costs of the manufacturing, service and commercial centers of a company, in order that the results of each one of them can be measured, controlled and interpreted, by obtaining unit costs and Totals in progressive degrees of analysis and correlation.

Figure 1: Interrelation between financial accounting, management accounting and cost accounting.

The main objectives of cost accounting are:

Evaluate the efficiency in terms of the use of material, financial and labor force resources that are used in the activity. Serve as a basis for determining the prices of products or services. Facilitate the assessment of possible decisions to be made., that allow the selection of that variant, that provides the greatest benefit with the minimum of expenses. Classify the expenses according to their nature and origin. Analyze the expenses and their behavior, with respect to the norms established for the production in question. Analyze the possibility of reducing expenses. Analyze the costs of each structural subdivision of the company, based on the expense budgets prepared for it.

A very accurate definition of cost is that of Pedersen: "Cost is the consumption valued in money of goods and services for production that constitutes the objective of the company". 3

For Schneider cost is "… the monetary equivalent of the goods applied or consumed in the production process". 4

The French General Accounting Plan contains the following definition: “The cost price of an object, of a benefit, of a group of objects or of benefits, is all that this object, this benefit, this group of objects or of benefits, in the state in which it is at the final moment¨. 5

According to Carlos Mallo Rodríguez: ¨ Cost does not arise until consumption is made, so it cannot be identified with the concept of spending that precedes cost. While the concept of cost addresses the "moment of consumption", the expense refers to the "moment of acquisition".

“The cost is constituted by the partial or total consumption of the inputs that in any production process contribute to obtaining the outputs. The cost represents the valuation, in monetary terms, of this contribution with the inputs to obtain the outputs¨. 6

The inputs and outputs are the inputs and outputs of the production process; entries refer to direct materials, direct labor, and other manufacturing overhead; outputs are associated with finished products or services provided.

In Cost Accounting, Horngren defines cost as "… the means in the conventional accounting form, in monetary units, that must be paid to acquire goods and services". 7

The cost is defined by Polimeni as: "The value sacrificed to obtain goods or services". 8

It is appropriate to clarify that: “Every sacrifice, to be cost, must increase the value of the good to which it is applied; Any sacrifice that does not meet this condition must be considered as a waste. 9

The concepts expressed on the term cost have been diverse, although all agree that cost is the value of material and human resources, consumed or used in the elaboration of a product or in the provision of a service, which constitutes a measure of productive economic efficiency, so their behavior makes it easier for us to evaluate the results.

When examining the content of the cost, it is appreciated that the concept of expense is broader and reflects the consumption of any resource over a period of time regardless of its destination within the company, therefore, it is commonly stated that the cost before if it was cost, it was expense. The cost of production expresses the magnitude of the material, labor and monetary resources necessary to achieve a certain volume of production with the required quality. It is made up of all the expenses related to the use of real estate resources, raw materials and materials, fuel, energy and the workforce in the production process, as well as other expenses related to the manufacturing process and sale of production, all expressed in monetary terms. As can be seen,the cost of production constitutes a part of the expenses, since the cost is linked to all those expenses that are associated with the production process and a certain volume of production achieved and, on the other hand, do not have a special source of financing.

Criteria for classifying costs.

When reviewing cost classification criteria, we can evaluate the following:

Regarding accounting periods:

Current costs: those incurred during the production cycle to which they are assigned. Expected costs: incorporate the charges to the costs in advance of the moment in which the payment is actually made. Deferred costs: disbursements that are made on a deferred basis.

Regarding the elements that make it up:

Production or industrial cost: Includes the cost of materials, labor and other manufacturing costs; it is normally used as a stock valuation criterion. When the product is sold, the cost of production is downloaded into the cost of the items sold. Distribution cost: It is the cost related to the marketing and delivery of the products to customers. Company cost: It is the total cost of the period that it is obtained by aggregation of production and distribution costs.

Regarding the production volume:

Fixed cost: It is the one in which the total fixed cost remains constant, regardless of whether the level of activity of the company varies, while the fixed cost per unit varies with production, that is, the fixed cost per unit is reduced to As the activity increases, by dividing the fixed costs among a greater number of units. (Figure 2).

Variable cost: It is the one in which the total variable cost changes in direct proportion to the variations in the production volume, while the unit variable cost remains constant. (Figure 2). Mixed cost: It is one that contains both fixed and variable cost characteristics.

Figure 2: Behavior of costs according to their variability with the level of activity.

Regarding production:

Prime cost: It is the one directly related to the manufacture of a product; It is equivalent to the sum of direct materials and direct labor, that is, the direct items of the cost. Conversion cost: It is the one incurred in the transformation of direct materials into finished articles; It is made up of direct labor and indirect manufacturing costs. It is observed that it considers direct labor as a direct item and incorporates indirect cost items.

Regarding its possible allocation:

Direct cost: It is the cost of materials and labor that management is able to identify with specific items or areas. This, like the prime costs, includes the direct items. Indirect cost: It is the one that, because it affects the process as a whole, is not directly identifiable with any item or area, so it is necessary to use allocation techniques for its distribution. This reflects indirect cost items as well as conversion costs.

Regarding the functions:

Manufacturing cost: Relates to the production of an item; It is the sum of direct materials, direct labor and indirect manufacturing costs. Marketing cost: The sale of a product or service is incurred. Administrative cost: The management, control and operation of a company are incurred.; includes the payment of salary to management and office personnel. Financial cost: Related to obtaining funds for the operation of the company; It includes the cost of interest on loans as well as the cost of granting loans to clients.

Regarding the degree of control:

Controllable cost: The managers of the areas of responsibility can exert direct influence on it. Non-controllable cost: It is not under the direct influence of the managers of the areas; their responsibility is assumed by the upper management levels.

Regarding the moment of calculation:

Real, retrospective, historical or effective cost: It is calculated from the actual consumption in the production process during a period of time. Standard, prospective or predetermined cost: It is calculated from the predetermined consumption, at a price determined for a period. future; It can be considered as a standard cost.

Regarding planning, control and decision making:

Standard cost: It is the cost per unit of direct materials, direct labor and indirect manufacturing costs, which should be incurred in a production process under normal conditions; they satisfy the same purpose of the budget. Budgeted cost: It is the total costs that are expected to be incurred in a certain period.

Basic elements of the cost of a product.

The production cost is the value of the set of goods and efforts that have been incurred or will be incurred, that the manufacturing centers must consume to obtain a finished product, in conditions to be delivered to the commercial sector. Direct materials, direct labor and indirect manufacturing costs expressed in value are part of the cost of a product.

Materials are the main goods used in production and transformed into finished articles with the addition of direct labor and indirect manufacturing costs. Materials can be divided into direct and indirect materials.

Direct materials are all those physical elements that are essential to consume during the manufacturing process of a product, its accessories and its packaging, and represent the main cost of the raw material in the manufacturing process. This with the condition that the consumption of the input must be proportionally related to the number of units produced.

According to Horngren, the direct materials are: "… all that raw material that can be physically seen as forming an integral part of the finished product and that its quantity in the product can be determined in a way that is economically feasible" 10

Indirect materials are all materials that are not directly associated with the manufactured product.

Indirect materials are those that “… the costs of determining the exact quantity of these materials in the finished product, in order to more accurately calculate the cost of the product, are not justified in terms of the benefits to be obtained”. eleven

Labor is the physical or mental effort expended on the manufacture of a product. Its cost can be divided into direct and indirect labor.

"Direct labor was defined as the labor that is directly involved in the production of a finished article, which can be easily tracked in the product and represents a significant cost of labor in its production ".12

Indirect labor is the one that does not participate directly in the production process “… it is not easily traced in the product and it is considered that determining the cost of labor in relation to the product is not justified”. 13

Indirect production costs or manufacturing charges are all production costs, except for raw materials and direct labor. They are all the costs that a center needs to incur in order to achieve its goals; costs that, except in exceptional cases, are indirectly assigned, therefore it requires distribution bases.

Indirect manufacturing costs can be subdivided according to the object of expenditure into three categories:

Indirect materials Indirect workmanship General indirect manufacturing costs.

In addition to indirect materials and indirect labor, manufacturing charges include the cost of acquiring and maintaining production facilities and other factory costs. Included within this category we have the depreciation of the plant and the amortization of the facilities, the rent, heating, electricity, driving force, property taxes, insurance, telephones, travel, etc. All indirect manufacturing costs are direct to the factory or plant.

The classification in fixed and variable costs is useful in preparing budgets for future operations. Costs classified as direct or indirect with respect to the product or department are useful in determining the profitability of product lines or the contribution of a department to the profits of the company.

Raw materials and direct labor give rise to disbursements, which are part of manufacturing charges. The first involves handling, inspection, maintenance, insurance, etc. costs. The second requires the provision of social services, personnel offices, time study offices, etc.

For product costing purposes, all costs incurred in the factory are eventually allocated to the production departments through which the product circulates. The accumulation and classification of costs by department is called distribution or allocation of costs. Costs that can be directly attributed to the department are assigned directly. Indirect manufacturing costs and service department costs are allocated on some basis to the production departments and are also allocated to production as it passes through the departments.

Classification of expenses for registration.

In the Cuban business context, expenses for registration are grouped by items and items, according to the provisions of the Ministry of Finance and Prices.

According to the general bases for business improvement "They are elements of expenses, those that are identified with their economic nature, whether or not they are directly or indirectly associated with the product or service". 14

The expense elements are all those that are incurred during the production or service process, such as administration, distribution, sales, and others unrelated to the entity's fundamental activities.

The general cost guidelines establish the following as elements of expenditure:

Raw materials and materialsFuelsEnergySalariesOther labor force expensesDepreciation and amortizationOther monetary expenses

The grouping of expenses by items is associated with the production or service process, with the fundamental objectives of determining and calculating the cost of the product, service or process. The cost items group the expenses, by the form of inclusion in the product, and by their direct or indirect incidence.

Expenditures are grouped by item due to the fact that the grouping by elements is insufficient for planning, recording, calculating and analyzing the cost of production by product type.

The established items are:

Direct cost items:

Raw Materials and Materials Salary and Other Labor Force Expenses

Indirect cost items:

Indirect Manufacturing Expenses

The recording of expenses is guaranteed from the Cost Accounting system used, through it, production expenses can be analyzed by areas of responsibility or by cost centers.

Cost system. Overview.

Cost systems are a set of methods, rules and procedures that govern the planning, determination and analysis of cost, as well as the process of recording the expenses of one or more productive activities in a company, interrelated with the subsystems that guarantee control of production and material, labor and financial resources.

Among the objectives of a Cost System, are those related below:

Establish guidelines to which the cost allocation procedures are submitted. Determine the criteria to be applied in the distribution and apportionment of expenses. Establish the opportunity or date on which costs must be calculated, the calculation methods, the bases that You can use, as certain costs have to be treated, a way to determine total and unit costs, as well as the methodology for cost budgeting and standard setting.

Cost systems can be classified:

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 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 that between fixed and variable costs. Variable costs are the only costs 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 the changes that occur in production.

The amount and presentation of profits varies under both methods. If the variable costing 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 by orders: It is used when it is manufactured according to special requests of the clients. Cost by processes: It is used when the production is repetitive and diversified, although the articles are quite uniform among 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 real inputs. Can be used for both order costs and process costs Default Cost: Costs are calculated based on estimated consumption. Within these predetermined costs we can identify 2 systems: Estimated cost or budget: it only applies when working on orders. They are costs that are set according to previous experiences. Its basic objective is the setting of sales prices. Standard cost: It is applied 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.

Accumulating routine cost of production data is a very time consuming task. An adequate accumulation of costs provides the administration with bases to predict the economic consequences of its decisions. There are two methods of cost accumulation, the periodic system and the perpetual system.

A periodic cost accumulation system provides limited information during the period and requires adjustments at time intervals to determine the cost of manufactured items. Under this system, physical inventories are taken periodically to adjust the inventory accounts and establish the cost of production. A periodic accumulation system is not considered as a complete cost accounting system as long as inventories of raw materials, work in process and finished items can be determined only after physical inventories are carried out. Because of these limitations, periodic cost accumulation systems are generally used in small manufacturing companies.A perpetual cost accumulation system is a method that provides continuous information about inventories of raw materials, work in progress, finished items, and cost of sales. This cost system is usually used in most medium and large companies. There are two basic types of perpetual cost accumulation system classified according to their characteristics: the work order cost system and the process cost system. Under the work order system, the three basic elements of product cost they accumulate according to the assigned number of production orders; direct materials and direct labor are accumulated for each order; manufacturing overhead costs are accumulated by department and then distributed to orders;Individual work in process inventory accounts are established for each production order and charged to the costs incurred in producing the specific work order. Under a process cost system, the three basic elements of product cost are accumulated according to the departments or cost centers; Work in process inventory accounts are determined for each department or cost center and are charged with the costs incurred in the production of the units that pass through the department.the three basic elements of the cost of the product are accumulated according to the departments or cost centers; Work in process inventory accounts are determined for each department or cost center and are charged with the costs incurred in the production of the units that pass through the department.the three basic elements of the cost of the product are accumulated according to the departments or cost centers; Work in process inventory accounts are determined for each department or cost center and are charged with the costs incurred in the production of the units that pass through the department.

Periodic accumulation systems generally record only actual costs, while perpetual systems use both normal and standard costing to accumulate costs.

The three stages of a cost system defined by Guatri are:

"Classification: Grouping of costs according to the characteristics of the factors or means. Location: Distribution of costs among the centers or production sections in which the process is carried out. Imputation: Attribution of costs to products ".15

Undoubtedly, in a cost system, expenses are initially grouped by elements according to their economic nature and by cost items according to their form of inclusion in the product and their direct or indirect incidence; secondly, costs are assigned to each structural subdivision of the company with the preparation of budgets; Lastly, costs are attributed to manufactured items for the primary purpose of establishing their sales prices.

The analysis of the results obtained in these stages will allow the company to know how much has been spent in the production process, how it has been spent and where it has been spent.

The minimum specific objectives of any cost system are:

Establish an internal valuation system for finished products, products in process, as well as the valuation of the cost of the products sold, a previous and necessary step in calculating the internal result. Create sufficient information to control production (productivity and performance). of the sections), costs (consumption) and results (profit or loss). Provide information for the optimization of the management of the company in order to better fulfill its objectives, both in the short and long term.

In summary, the objective of a cost system is not limited to the costing of the product for the valuation of inventories and the determination of results, but encompasses other purposes such as planning, control, analysis and decision-making. helping in budgets by areas of responsibility.

The cost system adopted in correspondence with the characteristics of the type of industry and its technical-organizational conditions must be reflected in official documents, such as a manual of norms and cost procedures that serve as a basis to guide the information collection process methodologically..

The organizational and technological differences in production in the various branches of industry and their companies determine the essential differences in cost systems that are usually used in practice in one or another type of industry.

The classification of the different cost systems is summarized below:

COST SYSTEMS

The cost per process system is used by companies that always produce the same products by the technology of the production process or by decision of the corresponding management level. This type of company has highly massive productions and the production process is joint.

In this type of industry, production is uniform and the manufactured units are subjected to the same processes and, therefore, it is assumed that each one receives the same costs.

Generally, the elaboration of a product requires the participation of several departments, in each of which the processed units are homogeneous. The central axis of the cost per process system is the accumulation of costs in each department or process for a given period, for example, one month. The direct costs of the departments or processes are also directly related to the products that pass through it, giving rise to direct items, while indirect items are assigned to processes and products by distributing indirect costs on an appropriate basis..

Along with the accumulation of costs, the production units produced in each department and in each period are counted, at the end of which the average cost per unit produced is calculated. This, in turn, serves as a basis for evaluating the production that is transferred to the next department or process.

In accordance with the above, the characteristics of the cost per process system can be summarized as follows:

Costs are accumulated on a time basis, typically monthly or quarterly. Expenses are accumulated by department or cost center or process. Production is periodically recorded and reported by department, cost center, or process. Costs are transferred from one department, cost center or processes to others to measures that the product is transferred. The cost per unit produced is calculated by dividing the cost of each department, cost center or process by the production obtained. Unit costs The different periods tend to be similar, since all the units receive the same treatment and require the same resources.

Below is a graphical representation of some of these cost characteristics by processes:

The types of existing costing are direct costing that could be more correctly called variable or marginal costing and traditional costing, sometimes called absorbent costing.

Traditional or absorbing costing is where manufacturing overhead is treated as a period cost (i.e., charged to immediate results) and not as a product cost (allocated to units produced).

In this costing, fixed production costs are assigned to the product and are subsequently applied to expenses as part of the cost of the merchandise sold.

Variable manufacturing costs, as well as fixed manufacturing costs, are also considered as an indirect cost.

In the traditional absorbent costing state, costs are seldom classified into the fixed and variable categories.

Standard cost.

The central objective of business improvement is framed in that the state company is the fundamental link of the economy; therefore, it is a question of enhancing their level of efficiency, authority and executivity. In this regard, Carlos Lage Dávila points out "… Efficiency, a word often repeated throughout the Economic Resolution project, It must be transformed from an economic concept into a way of acting, controlling and demanding, from those who lead to each worker." 16An important point for achieving the efficiency of Cuban companies is the adequate control of costs, for this, cost valuation techniques are used, including techniques based on the use of real costs and those based on in the use of predetermined costs and within these standards,business improvement recognizes that the latter “… constitutes the most advanced technique of predetermined costs…” 17 thus evidencing its great importance.

Currently, in our companies, the degree of awareness necessary to understand the need for the implementation of standard cost systems has not been created, although there are some that use it, the use of this technique should be generalized to achieve the fundamental principle of business improvement: the achievement of business efficiency.

Castagnoli states that: "… the purpose of standard cost is to define, in the most rational way, what should be the amounts, physical or monetary, used to manufacture a product or provide a service at an adequate cost". 18

Rapin and Poly point out that: "… the costs and standard cost prices are costs and prices previously calculated from working conditions considered as possible and desired". 19

The predetermined costs are those that are calculated before starting the production process, divided into estimated or standard costs, depending on the base used for its calculation.

The estimated cost indicates what a product could cost, with a relative degree of approximation, in the absence of rules that allow it to be calculated more rigorously. It is the amount that, according to the company, a product or the operation of a process will actually cost over a period of time. Frequently, the estimated cost is based on some average of real production costs from previous periods adjusted to reflect the changes in economic conditions, efficiency, etc., that are anticipated for the future. Generally estimated costs include an amount that reflects anticipated waste and deficiencies and increases unit and total costs of the product and operation.

Normal cost means approximately the same as estimated cost. Sometimes it is given a somewhat different meaning than an average of costs that have actually occurred in previous periods only, without taking into account the changes expected for the future.

Saying budgeted cost is equal to saying estimated cost or normal cost; In other words, budgeted cost is the planned cost, which is often based on an average of past costs adjusted for changes expected in the future. This similarity between estimated cost, normal cost, and budgeted cost can be seen in commercial companies that build their budgets on the basis of the estimated normal cost of manufacturing.

Standard cost presupposes the use of a rigorous regulatory basis. The calculation thereof consists of the prior determination of the price and the quantity of the resources necessary to execute a production and has the advantage that it establishes the norm for the adequate exercise of the control function, constituting the basis for comparing costs. real, in determining the deviations that will be subject to analysis and decision-making, it is also an effective instrument of company management to combat waste and increase the productivity of labor.

Standard costing applies to any cost system, either by process or by work order. When a standard cost system is used, physical patterns and prices are established for material and human resources; separate indirect cost quotas are used for variable costs and for fixed costs; analysis of costs by items is carried out; Variations are calculated and recorded.

The application of standard costs, in companies with cost systems for work orders, has limitations regarding the cost of its implementation, since the calculation of standards would be highly complex, taking into account that they manufacture a large diversity of products or services.

The abundant literature that exists in the medium, usually by North American authors, has allowed different names to be given to the same thing. In another order of ideas the same standards have been called in different ways.

Basic standards:

They are considered constant standards. They provide the basis for comparing real costs over the years with the same standard, thus highlighting trends. The effects of prices and changes in efficiency are calibrated by comparing them with that prevailed when standards were determined. Basic standard costs are seldom used since frequent changes in products and methods require changes in standards, thus losing trends in meaning due to the short time that elapses within such changes.

Perfect, ideal, maximum efficiency or theoretical standards:

These are the absolute minimum costs that are possible under the best conceivable operating conditions. They are used when the administration considers that they provide psychologically productive goals.

Achievable Standards in current operation:

They are the ones that should be incurred in efficient operating conditions in the immediate future. They are difficult to achieve but not impossible. The variations may be rather unfavorable than favorable, but the latter can be achieved with a little more than the expected efficiency.

Establishing standard costs for direct labor, direct materials, and manufacturing overhead is an important part of any standard cost system.

Direct material cost standards can be divided into price and efficiency standards. Efficiency standards are predetermined specifications about the amount of direct materials needed in the production of a finished unit.

Efficiency standards should include all materials that can be directly identified with the product. Typically, standard quantities are professionally developed and made of the most economical materials based on product design and quality. When many different kinds of materials are required, the so-called standard raw material list is made.

The price standard may be based on recent and past average prices, current prices, or expected prices for the period in which the rules will be effective. Furthermore, as they are particularly useful for short-term decision-making, many companies prefer to stick to future price changes, especially in an inflationary era.

Direct labor standards can be divided into price and efficiency standards. Efficiency standards are predetermined based on the number of direct labor hours required in the production of a finished unit. Time and motion studies are frequently used to determine labor standards; or synthetic rules are used. These are based on tables that contain the standard time allocation for various movements and other elements involved in a job. Synthetic time standards require a very careful and detailed job description. Averages of past performances are generally used as time standards.

Some companies use test runs as the basis for setting labor time standards. The standards established on this basis are usually not satisfactory, since it is difficult to simulate the actual operating conditions on an experimental basis.

For the determination of the direct labor price standard, it is necessary to know the operations to be carried out, the quality of the labor desired and the average hourly rate expected to be paid. The hourly wage rate can be based on union agreements.

In general, changes in labor wage rates are not controllable. However, if the actual rate is based on a contract agreement, a variation in the rate may occur as a result of the use of higher or lower quality labor than provided by the standard.

There may be several different kinds of unit labor costs. Salary rates can be based on different skills or experience, or on both factors. When wage rates are determined through union agreements, it is practical to recognize that the rate thus established is, in essence, the standard rate.

Setting standards for manufacturing overhead costs is similar to setting standards for direct materials and direct labor. The biggest difference is because manufacturing overhead must be divided into variable and fixed costs. Budgeted variable and fixed costs are generally divided by the estimated level of production to calculate the standard application rate of manufacturing overhead.

A key factor in determining the rate of application of manufacturing overhead is production capacity since the estimated level of production is largely determined by it. Productive capacity is understood as the maximum amount of production that can be achieved with the full use of the resources of each entity; it is determined in physical units. The productive capacity of a company depends on many factors: physical size and conditions of the building and factory equipment, availability of resources such as trained workforce and diversity of raw materials, etc.

To project the level of production corresponding to future periods, the following levels of productive capacity can be used:

Theoretical or ideal productive capacity: it is the maximum performance that a department or area is capable of producing without considering interruptions in production due to work stoppages due to idle time on the machines, for repairs or maintenance, holidays and breaks. At this capacity level it is assumed that the plant operates 24 hours a day, 7 days a week and 52 weeks a year. Practical or realistic production capacity: it is the maximum production achievable, considering foreseeable or inevitable interruptions in production. normal: it is the one that is based on practical productive capacity and consults the demand for the product by customers; it must be equal to or less than the practical productive capacity. Expected productive capacity: it is the capacity that is based on the estimated production of the following period;it may be equal to or less than normal productive capacity.

In our country there are difficulties regarding the definition of capacities, mainly motivated by the blockade imposed by the United States, which prevents raw materials from arriving on time, being of optimum quality, purchased at reasonable prices, etc.; Another difficulty lies in the obsolete machinery that our companies have, among others.

Once the level of production and total manufacturing overhead have been estimated, the predetermined rate of manufacturing overhead can be calculated. Indirect manufacturing cost application rates are generally set in terms of pesos per unit of the estimated activity of some basis called denominator activity.

The following bases are generally used in calculating the application rate of indirect manufacturing costs:

Production units. Direct materials cost. Direct labor cost. Hours of direct labor. Machine hours. Basic salary of direct workers.

An important point to always keep in mind is that standards should not be rigid; they should be periodically reviewed to determine if they are still achievable in production; if they are incorrect they should be evaluated and replaced by new ones. If they are changed very often the effectiveness of the standard cost system decreases.

The standard cost system is of great importance in controlling the efficiency of the factory load, in the budgeting process and in decision-making.

Cost norms or standards can be an important instrument for evaluating performance. Variations in the norms lead management to implement cost reduction programs focusing attention on areas that are out of control. Standard costs are useful to management for the development of their plans. The same process of setting standards requires careful planning in areas such as organization, allocation of responsibilities, and policies related to performance evaluation. Standard costs are useful in decision-making, especially if costs are differentiated fixed and variable and whether material prices and labor rates are based on expected cost trends over the next period.

Standard costs, like everything, have disadvantages, among them are:

In practice it is very difficult to adapt to a specific conceptual structure, due to the rigidity or flexibility and thus the costs cannot be calculated with precision, the inflation that forces them to change constantly.

Standard and Estimated Cost Sheet.

For each main or auxiliary product or productive service provided in a company, an estimated or standard cost sheet can be prepared that will contain all the costs, such as materials, wages and other indirect costs that are required for its elaboration.

It will also serve to calculate the sale price, once the total cost and the percentage of profits to be achieved have been determined, planned or determined by the Ministry of Finance and Prices or others. So you can know in advance the cost of its production and the possible price of sales.

It will also contain technical specifications of the materials to be used and the qualification of the workers who must participate and others according to the production requirements for their execution.

This sheet will reflect the planned cost for a given production, especially the direct cost issued each time it is necessary to determine an estimated or standard cost, taking into account existing variations in quality, measures and prices of materials and qualification of the workforce. when necessary, as well as the specific characteristics of the workshop that is going to manufacture it, being able to give the same production case, having different costs, given the workshop that produces them or the service provided.

This model, once elaborated, can be done by the workers of production or economy or between both, keeping one copy on the production front and another on the economy, being used by both in their work, on the front of:

Production: To prepare Work Orders, calculation of sales price, types of raw materials, necessary personnel, use of production equipment, use of installed capacity, etc.

Economy: To know the planned consumption of resources, estimated cost for comparison with the real cost, preparation of plans, calculation of planned efficiency, etc.

This is a fundamental document for the implementation of the Cost System, for the analysis and control of the results in their comparison with the estimates, serving as the basis for the control of the real cost for specific orders in the allocation of resources, and must be done for each product that is manufactured, making as many cost sheets, as alternatives exist in the manufacture of the same product in the entity.

The alternatives will be given by the quality of the materials, their measurements, price, quantities to produce, qualification of the workforce, manual labor, equipment to be used, etc.

Historically, the need for a cost system arises from the passage of production to a developed industrial scale. Modern production, based on the increasing use of technique, entails an increase in the degree of complexity of production management based on the multiple factors involved in the production process and their reciprocal conditionality. In these circumstances it is impossible to calculate with a certain degree of accuracy the cost of the different products that a company manufactures using empirical procedures, much less reveal the ways of reducing them.

Modern accounting systems contain, in addition to the accounts and records of general accounting, a set of accounts and records intended for the analysis of expenses and economic control of the physical stocks of means of production; but the process of compiling and accounting record of the primary data referring to the expenses of productive resources that the company incurs in the development of its activity, requires the organization of a cost system.

The requirements that are required for the introduction of a cost system to be successful, that is, for it to be an agile system and as accurate as possible in the information produced from it, are the following:

Adequate control of the basic and rotation resources made available to the company. Efficient organization of the reception and dispatch system for raw materials, materials, semi-finished products and other work objects that are consumed in the production process. Rigorous control of the hand of employed work, taking into account the specific work carried out by the different categories of workers, the time spent, compliance with work regulations and wage rates. Strict control of the production process in all its phases, so that, in each one of them, the volume of production in process, the quantities that are received processed from the previous phase and those that are transferred to the next form until their complete completion and storage are known.Specialized personnel to operate the system and exact definition of its specific functions.

CONCLUSIONS

In the development of the work, the need for a theoretical foundation on cost activity has been demonstrated due to its importance, in addition to theory being the basis of practical knowledge; showing that in the company there is no theoretical basis for the creation of a procedures manual that methodically regulates the registry, control, calculation and analysis of the costs of the activity of tobacco benefit.

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