In this work, basic concepts of General Accounting are exposed. Financial Accounting and Management Accounting are characterized, delving into Cost Accounting in detail.
Terms such as Costs and Expenses, classification of costs, elements of expenses and the main characteristics of the currently existing Cost Systems are discussed, as well as the premises for the implementation of these systems, specifying in the Order Cost System, which are of vital importance for companies today.
Accounting Overview
Accounting is a science of an economic nature whose object is the past, present and future knowledge of economic reality in quantitative terms at all organizational levels, through specific methods supported on sufficiently contrasted bases in order to prepare information that covers financial needs external and internal planning and control.
Financial and Management Accounting. Particularities
Financial Accounting together with Management Accounting constitute the two most important branches of Accounting. 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, with the aim of providing information for decision-making on production, training internal cost price and sales price policy and analysis of results by contrasting with the information revealed by the factor and product market,based on the technical laws of production, the social laws of organization and the economic laws of the market.
Management Accounting not only encompasses the internal decision-making of the company, but is also used for external analysis of its behavior with respect to the competitive environment.
Cost Accounting is a branch of Management Accounting, which is fundamentally related to the accumulation and analysis of cost information for internal use by managers, in the valuation of inventories, planning, control and decision making.
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 through the obtaining of unit and total costs. in progressive degrees of analysis and correlation.
Among 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 and / or services. Facilitate the assessment of possible decisions to be taken that allow the selection of that variant that provides the greatest benefit with the minimum of expenses. Classify costs according to their nature and origin. Analyze their behavior with respect to the standards established for the production or service in question..Analyze the costs of each structural subdivision of the company from expense budgets prepared for it.
Basic terminology of cost
The concepts expressed on the term Cost have been diverse, although all agree that cost is the value of the material, human and financial resources consumed or used in the elaboration of a product or in the provision of a service, which constitutes a meter. of productive economic efficiency, so its behavior makes it easy to evaluate the results.
When examining the content of the cost, it can be seen 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 entity, therefore, it is stated that the cost before being cost it was expense.
The difference between cost and expense is not trivial. It must be taken into account that all the resources that a company uses must be classified in one of these two categories. The costs, as defined above, are those resources that are applied to the manufacture of the goods or services that the company offers, while the expenses would be those resources applied in the accounting period, which were incurred to obtain the income of a certain period, or that the company necessarily had to incur to exist during it.
The cost of production is the value of the set of goods and efforts that have been or will be incurred that must be consumed by manufacturing centers to obtain a finished product. This indicator constitutes an important generalizing index of the efficiency of the company, it shows how much it costs the company to produce certain articles or provide certain services. The cost reflects the level of labor productivity, the technical level, the degree of efficiency of tangible Fixed Assets, as well as the saving of material, labor and financial resources.
The determination of the real cost of production is of great importance for the Economic Directorate since it allows determining the expenses of the activity and the profit of the company, evaluating and calculating inventories of production in process and finished production, establishing or demonstrating price lists., plan according to the level of activity foreseen in the indicators for a period of operations, control inputs in the production process and make decisions for new production and sales alternatives.
Taking production as a fundamental aspect, cost analysis is of great importance because:
- It expresses to a considerable extent the results of all the productive and economic activity of the company. It is a basic element for the formation of the price. It is determinant of the magnitude of the profit and the level of profitability of the production. The systematic reduction of the cost of Production is one of the sources of socialist accumulation on whose level depend rates of expansion of socialist reproduction and the subsequent elevation of the material and cultural level of life of the population.
Unit Costs: The average unit cost or cost per unit volume, is the quotient of dividing the total cost by the volume of activity, the unit costs are therefore average values. A fundamental point in this question is to see that the cost per unit of "volume of activity" behaves very differently from how the total cost does.
Total Costs: Includes the manufacturing cost plus the expenses incurred in its distribution and sale process.
Cost classifications
The classification of costs can be done in different ways depending on the chosen classification criteria, the main ones are:
Elements of the cost of a product
- Materials Workmanship Other manufacturing costs.
materials
Materials are the main goods used in production and transformed into finished articles. These materials can be divided into direct and indirect materials.
Direct materials are all those physical elements that are essential to consume during the process of making a product or service, and represent the main cost of the raw material in the manufacturing process.
Charles Horngren, in its fourth edition, defines direct materials as: "… all that raw material that can be physically observed 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".
Indirect materials are all materials that are not directly associated with the finished product or service.
Charles Horngren, in its fourth edition, defines indirect materials as: “… 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 benefits to be obtained ”.
Workforce
Labor is defined as the physical or mental effort expended on the manufacture of a product or service. Its cost can be divided into direct labor and indirect labor.
Charles Hongren, in its fourth edition, states: “Direct labor is 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 labor cost of important work in its production ”.
Indirect labor is that which is not directly linked in the production process.
Charles Hongren, in its fourth edition, states: “… it is not easily traced in the product and it is considered that it is not justified to determine the cost of labor in relation to the product.
Other Manufacturing Costs
The other manufacturing costs are all production costs except materials and labor. They are those in which a center incurs for the achievement of its ends, except in exceptional cases, they are indirectly assigned, and therefore require distribution bases. Here the term Indirect Manufacturing Cost appears.
For its incorporation into the product
Ø Direct: They are those that are identifiable with specific units of production or given service.
Ø Indirect: They are those that are not identifiable with the product or service and that are related to it indirectly.
These indirect costs are part of the term Indirect Manufacturing Cost, which are the costs used to accumulate indirect materials, indirect labor and all other manufacturing indirect costs that cannot be directly identified with specific products, for example. Indirect manufacturing costs in addition to indirect materials and indirect labor include: leasing of warehouses, offices, cars, energy, depreciation of factory equipment, and others.
Therefore, the cost of a product and / or service can be defined as the sum of direct materials, direct labor and indirect manufacturing costs.
For your better understanding, the following diagram is shown:
Source: self made.
According to the period in which the income will be charged
- Product cost: These are the costs that are directly and indirectly identifiable with the product. They are direct materials, direct labor, and indirect manufacturing costs. These costs do not provide any benefits until the product is sold and therefore would be invented until the end of the product. When products are sold, the total product costs are recorded as an expense. This expense is called the cost of the items sold that face the income of the period in which the products were sold.Cost of the period: These are the costs that are not directly or indirectly related to the product and therefore, they would not invent. Period costs are canceled immediately, since no relationship between cost and income can be determined.
Due to their relationship with the level of activity. Variables: They are those that undergo changes in their total magnitude in proportion to the volume of production and remain constant in their unit magnitude. Fixed: They are those that remain unchanged in their total magnitude, regardless of the increase or decrease in production volumes and vary inversely proportional to production volumes in their unit magnitude. Mixed: These costs contain a fixed portion and a variable portion, over several relevant ranges of operation
Due to their relationship at the time of calculation. Real: It is calculated from the actual consumption in the production process during a period of time. Default: It is calculated from the predetermined consumption, at a price determined for a future period.
Elements of expenditure
The expenses for its registration are grouped by elements 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.
The elements of expenses are 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 expenses:
- Raw materials and materials: Includes raw materials, basic and auxiliary materials. Fuels: All expenses originated in the consumption of the different fuels purchased for technological purposes to produce energy are included, whether associated with the production, administrative, distribution or sale or outside the fundamental activities. Energy: Consists of all forms of energy acquired by the entity, intended to cover technological needs and other electrical demands. Salaries: Includes all the compensation paid to workers, including the accumulated vacations, bonuses, payments for abnormal conditions and any remuneration for work carried out from the wage fund.Other labor force expenses:Includes the expenses originated by the application of the rates approved by the current financial legislation that is contributed as a contribution to the state and as a tax for the use of the labor force. It also includes payments for short-term social security payments made to the entity's personnel within the limits established by law. Depreciation and amortization: Includes expenses for the use of tangible fixed assets based on the application of the rates established for this purpose at their initial values (in the case of depreciation); It also includes expenses for the use of tangible fixed assets and the aliquot distribution of the values paid by them. Other monetary expenses:It includes, among others, the expenses associated with the entity that are not identified with the elements described above, among which the expenses of personnel in commission of services, taxes, payments for productive and non-productive services purchased, etc. can be cited.
Cost items
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 its 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.
Direct cost items:
- Raw materials and materials. Salary and other labor force expenses.
Indirect cost items: Indirect manufacturing expenses.
Cost Systems
The cost systems are a set of methods, rules and procedures that govern the planning, determination and analysis of the cost, as well as the process of recording the expenses of one or several productive activities in a company, interrelated with the subsystems that guarantee the control of production and / or services and material, labor and financial resources.
Among the objectives of a cost system are:
- 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 they can use, as certain costs have to be treated, a way of determining total and unit costs, as well as the methodology for cost budgeting and standard setting.
In order to calculate the cost of the units produced or the service provided, it is necessary to define a system to apply them to the activity. In general, two Cost Accounting systems can be applied according to their concentration:
- Cost System for Process Cost System for Work Orders.
Cost per Process System:
It is applied in companies or in continuous or mass processing industries, where equal units are produced subject to the same production processes. It constitutes an average cost, where each physical unit of production is assigned an aliquot of the whole that represents the cost of production. It is used when products are made using high-volume production techniques (continuous processing). Process costing is adequate when producing homogeneous items in large volumes as well as in oil refineries, in a sugar factory, or in a steel factory.
Under a cost-per-process system, the three basic elements of a product's cost (direct materials, direct labor, and manufacturing overhead) are accumulated according to departments or cost centers.
Cost System for Work Orders:
It is the set of principles and procedures for recording the expenses identified with specific production orders, which allows finding a unit cost for each order and determining the different cost levels in relation to total production, in companies where production it is made by order.
A work order cost accumulation system is more suitable where a single product or a group of products are made according to the specifications of the clients, that is, each job is made to order.
Objective of the Cost System for Work Orders
Respond to orders as requested by clients based on previously established specifications.
Under a Work Order Cost System, the three basic elements of a product's cost, that is, direct materials, direct labor, and indirect production costs, are accumulated according to their identification with each order.
In this system, the incorporation of expenses into the order is carried out taking into account the Cost Sheet, the main document in the system, and one will be issued for each work order that has been sent to the production workshops. This cost sheet starts from when the job is executed, and is the auxiliary ledger of the Production in Process account and is completed in detail and filed upon completion of work orders.
To add the direct materials to this cost sheet, there is a primary document called the Delivery or Return Voucher, which will reflect the order number for which it is assigned and accounting on your part proceeds to record the consumption of the each order in the Production in Process account.
Regarding direct labor, this is determined according to the summary of time and work detailing the hours worked by the workers in each order, which will allow identifying the cost of direct wages incurred in the orders and reflected in the accounting the Production in Process account.
Other expenses that are not identified with an order and are considered indirect, to the extent that they are incurred, are recorded in the Indirect Manufacturing Costs account. For its apportionment between orders, it is convenient to determine an application rate which can be Real or Default.
If the application rate is Real part of the historical data using the Real Costing Method and if the application rate is predetermined, the data from the budget are taken, using the Normal Costing Method.
The application rate is calculated by dividing the total manufacturing indirect costs by the total of a base, which can be the direct material expense, direct labor hours, machine hours, production units and labor cost. direct.
Once the production order is completed, it will be transferred to the finished production warehouse and accounting will proceed to post said production in the Finished Production account, for subsequent sale to the customer. Already invoiced and held by the customer, the cost of sale is registered.
Selling and administrative expenses are not considered part of the production cost of the work order and are shown separately in the income statement.
A work order cost accrual scheme is shown below for better understanding.
Legend:
PP: Production in Process.
PT: Finished Production.
CV: Cost of Sale.
Source: self made.
Premises for the Implementation of Cost Systems
For companies to implement a Cost System, they must create certain minimum conditions, so that the results are solid and permanent, since cost accounting is aimed at cost per product, through adequate control of cost elements and This is achieved in addition to analytical accounting with the creation of an organizational base that guarantees its implementation, such as:
a) Assign the task for the adaptation and implementation of the Cost System to a person who serves as a management tool.
b) Assign the task to the personnel that will be dedicated to the control, registry and analysis of the expenses with the planned, estimated costs, etc. to determine its efficiency and apply its results timely and appropriately.
c) To implement periods of analysis that make it compulsory for the evaluation of administrative economic management at various levels.
d) Stimulate results, compliance at the implementation stage and subsequent monitoring of exploitation and profit.
Expenses should be recorded uniformly and when they occur so that they are reliable and effective when compared to regulated costs.
For the effective implementation of this system it is necessary to start at the base, in the production unit to consolidate a good information flow, so that the data that is controlled is reliable and accurate, for the recording and subsequent analysis of the actual and estimated results.
The information system must be established in the workshops, organizing the base, systematizing, establishing the working methods through the creation of conditions or previously implementing a modeling to collect the information, establishing work habits that make the cost system work in each of the areas of each workshop such as warehouses, transportation, service departments, etc.
In summary, it is considered necessary to take into account the aspects detailed below for the proper implementation of an Order Cost System.
1. Determine the areas of responsibility.
2. Determine the direct and indirect production personnel.
3. Daily work report.
4. Control of the consumption of materials by work orders.
5. Returns of materials to the warehouse.
6. Report of finished production.
7. Implementation of the work order.
8. Transfer of work orders between areas.
9. Control of waste for sale.
These aspects can be grouped into three main groups:
Organizational aspects: Develop an organization plan for the different areas for the elaboration and implementation of the normative bases of consumption for the resources that require it.
Methodological aspects: Establishment of an adequate inventory control system for the recording and analysis of material costs, establishment of a method for controlling indirect costs and the actual time worked, preparation of methodological and specific standards for planning and control. maintenance work.
Aspects related to the operation of the system: Organization of the flow of information to be supplied to the accounting area. Preparation of expense budgets. Determination of actual expense reports compared to approved budgets and analysis of variations.
