What is cost accounting?

Cost accounting is an area of accounting that deals with the planning, classification, accumulation, control and allocation of costs. It is also known as analytical accounting and forms, together with administrative accounting and financial accounting, the accounting structure of the organization. Next, answering the questions, what is cost accounting, what are its objectives, how can it be applied, what is its importance and what are its characteristics, an introductory guide is attempted to the wide and interesting world of cost accounting. costs.

What is cost accounting. Objectives, how it is applied, importance and characteristics

Here are some definitions of cost accounting that will allow you to understand and expand your concept.

For García and Jordà (p. 107), cost accounting is defined as an information system that allows the valuation of goods and services derived from the productive activity of the company, complying with generally accepted accounting principles.

Hargadon and Múnera (p. 1) indicate that, in a general sense, it would be the art or technique used to collect, record and report information related to costs and, based on said information, make appropriate decisions related to planning and their control.

Reveals (p. 38) points out that cost accounting is an information system used to predetermine, record, accumulate, distribute, control, analyze, interpret and report on the costs of production, distribution, administration and financing. It is an area of accounting that includes the predetermination, accumulation, recording, distribution, information, analysis and interpretation of production, distribution and administration costs.

According to Cárdenas (p. 43), cost accounting is the name given to an orderly system of use of the principles of general accounting to record the operating costs of a company, in such a way that the accounts that are carry in relation to production, administration and sale, serve administrators for the determination of unit and total costs of the items produced or services rendered, in order to achieve economic, efficient and profitable exploitation.

For their part, Sinisterra and Polanco (p. 20) point out that generally cost accounting is understood as any accounting technique or mechanics that allows calculating what it costs to manufacture a product or provide a service. It is a general ledger subsystem that is responsible for handling all the details regarding the total manufacturing costs to determine the unit cost of the product. By manipulating cost data, its classification, accumulation, allocation and control must be understood. Contributes to the income statement by determining the cost of products sold; collaborates with the balance sheet, determining the cost of the inventory of products in process and the inventories of finished products.

Horngren, Foster, and Srikant (p. 2) state that cost accounting measures, analyzes, and presents financial and non-financial information related to the costs of acquiring or using resources in an organization. Provides information for both management accounting and financial accounting. For example, calculating the cost of a product is a cost accounting function that responds to the inventory valuation needs of financial accounting and the decision-making needs of management accounting (for example, the choice of products to offer). Modern cost accounting takes the perspective that the collection of cost information is a function of the managerial decisions that are made. So,the difference between management accounting and cost accounting is not clearly defined and the two terms are often used interchangeably.

What are the objectives of cost accounting?

García and Jordà (p. 108) establish the following three, as the fundamental objectives of cost accounting:

Planning and control. Planning is the part of the business management process in which the long-term goals of the organization and the strategies to achieve them are determined. In this case cost targets. Control is the part of the business management process used to measure whether the proposed objectives are being achieved. Valuation of goods and services. Cost accounting allows the valuation of the goods produced and services provided, which also means obtaining the valuation of the inventories that remain at the end of the period in the company. Decision making. Cost accounting provides the necessary instruments to determine the most suitable product policies based on their costs.

Sinisterra and Polanco (p. 83) propose, as cost accounting objectives, the following:

Accumulate cost data to determine the unit cost of the manufactured product Provide company management with cost data necessary for planning of manufacturing operations and control of production costs Contribute to control of manufacturing operations.Provide the different levels of the administration with all the necessary cost information for budgeting, economic studies and other special decisions related to long and medium term investments.

Hargadon and Múnera, (p. 2) propose, as main purposes of cost accounting, the following

Determine the cost of inventories of both unit and global manufactured products, with a view to presenting the balance sheet Determine the cost of products sold, in order to calculate the profit or loss in the respective period and prepare the statement of income and expenses Provide management with a useful tool for planning and systematic control of production costs Serve as a source of cost information for economic studies and special decisions related mainly to long-term capital investments, such as such as replacement of machinery, plant expansion, manufacturing of new products, setting sales prices, etc.

According to Reveles (p. 40), the objectives of cost accounting are:

Provide timely and sufficient information to the management of the company, for better decision making Generate information to help management in the planning, evaluation and control of the operations of the company Determine unit costs to regulate management policies, in order to evaluate the inventories of production in process and of finished articles Generate reports to determine the profits, providing the cost of the articles sold Contribute to the planning of profits and the choice of alternatives by the management, contributing in advance the costs of distribution, production and financing. Support in the elaboration of the budgets of the company, in the sales, production and financing programs.Collaborate in the strengthening of the coordination and support mechanisms between all the areas, for the achievement of the company's objectives.

How can cost accounting be applied?

According to Reveles (p. 41) the application of cost accounting in a company involves the following phases:

Record of expenditures under appropriate classifications, as they are caused, for example: purchases of material, consumption of the same, rent payments, application of depreciation, etc., using for this purpose, an appropriate chart of accounts. apply these expenses to the corresponding activity; that is, precise application to the respective manufacturing order or process. Determination of unit cost, the primary object of cost accounting.

On the other hand, to apply a cost system based on activities, the following steps must be followed (Barragán, p. 25):

Identify and define relevant activities Organize activities by cost centers Identify cost components Cost allocation: Identify cost drivers

When it comes to the implementation of a costing system by production order, the following steps are taken (Joya, p. 53):

Identify the work or order to be costed Identify the direct costs of the job Select the cost allocation bases that will be used to allocate indirect costs to the job Identify the indirect costs related to each allocation base cost Calculate the indirect costs associated with the job Calculate the total cost of the order

For the application of a process cost system (for a process) the steps are as follows (Joya, p. 54):

Summarize the flow of physical units Calculate final production in terms of equivalent units Calculate cost per equivalent unit Summarize total costs to be accounted for Assign total costs to finished units and units in production ending inventory in process.

The selection of the cost system to implement in a company should be based on its own characteristics in terms of its production and operations, its possibilities and its limitations, but always with the purpose of achieving an improvement of the information that enables the optimal decision-making by management.

Through the following series of video lessons, Professor Jorge Ignacio Lardizábal, teaches us more about the concept and objectives of cost accounting, as well as to identify the main elements to consider to make a reasonable calculation of unit costs in companies. industrial.

What is the importance of cost accounting?

Cost accounting is an essential part of the accounting system of companies, among others, the information it provides affects the policies and objectives of senior management as follows:

Determines optimal quantities of inventories, important for, for example, calculating financial liquidity ratios and making decisions about them. Provides specific information for determining the sale price of products. With which it is possible to define which products yield higher profits and which ones do not, based on which it is possible, for example, to focus the firm's production and commercial efforts. Through the analysis of fixed and variable costs it is possible to determine of the company's economic equilibrium point Disaggregates the different elements that make up the cost of the product, which allows, for example, to know where investments are required in plant and equipment improvement or in training of human resources to improve productivity and efficiency,or where there are wastes of resources, materials, time and labor that affect production and reduce utility. That is to say, they serve to control and measure the efficiency of business production. It assigns quantitative values to the different production scenarios (budgets) that the management studies and proposes.

An integrative vision of the importance of cost accounting for the company and its administration is provided by Arredondo (p. 2), who very accurately explains this relationship as follows:

Let's imagine products or services, they can be from plays, cinematographic films, computer equipment, beauty products, edible products, etc.; All these products and services generate income, perhaps millions of pesos, however, each and every one also generates costs. Before deciding to launch them on the market for sale, not only a market study must be carried out to predict their acceptance, but also a cost study to know their future profitability.

Cost accounting must be considered as a key element of management in all planning, control and strategy formulation activities since it provides the essential accounting tools to achieve the proper functioning of some phases of the administrative process such as planning, control and evaluation of operations.

In the planning phase, cost accounting makes projections into the future through budgets. With this you can determine future costs in terms of materials. wages, salaries, and manufacturing expenses that are involved in making a product.

These projections can be used to determine prices or to optimize profits considering some strong determinants in the market such as competition.

Additionally, it helps decision-making by increasing the productive capacity of the company or its facilities. manufacture or buy, rent or buy, include additional processing to the product, reduce or increase a working day.

When we talk about control, cost accounting refers to the present time, since it compares the actual results obtained with what is budgeted in the planning phase. In this phase, some operational failures can be identified that allow us to achieve profit maximization.

Finally, the evaluation phase involves a critical analysis of the results that were actually obtained and the problems that arose and the deviations that were obtained with respect to the expected results are analyzed. in such a way that the causes that originate them can be eliminated or isolated. In addition to providing corrective actions for current operations, the evaluation phase should provide management with suggestions for improving future planning activities.

What are the characteristics of cost accounting?

Returning to Sinisterra and Polanco (p. 21), cost accounting must be:

Use special documents to collect the information. Examples of these documents are: purchase orders and purchase requisitions, requisitions, raw material consumption reports, time cards, pay sheets and cost sheets. It uses its own accounts and recording procedures. Some examples of these accounts are: raw materials, products in process, finished products, cost of sales, indirect costs and factory payroll.The reports that you supply, cost statements, are prepared to know in detail the expenses and charges made to produce the goods.

Ramírez, García and Pantoja (pp. 48 and 49), note the following characteristics:

Provides permanent inventories of materials or raw materials, products in process and finished products with their respective valuations, for which it provides a lot of help in the administration of inventories. It contributes with the timely and objective presentation of statistics, accounting information and operational information derived from the activities associated with production. It facilitates the establishment of controls related to the acquisition, conservation and disposition or use of the elements that concur in the production of the products and on the products themselves. It is the pillar of the system. of permanent inventories, whose contributions allow making objective and timely valuations and, additionally, reinforcing controls on products, allowing the determination of unit costs,which, among other things, are used to plan and control production volumes, product costs and promote sales and pricing policies. Provides accounting and operational information with the degree of detail and user requirements. Contributes to formulation, presentation and budget controls and facilitates profit planning.

Bibliographic references

Arredondo González, María Magdalena. Accounting and cost analysis. Grupo Editorial Patria, 2015.Barragán V., Nataly C. Implementation of a cost system for Soldimontajes Ltda. Universidad Pedagógica y Tecnológica de Colombia. Thesis, 2015, Cardenas and Naples, Raúl Andrés. Costs 1. Instituto Mexicano de Contadores Públicos, AC, 2016. García Parra, Mercedes and Jordà Lloret, Josep M. Financial management. Univ. Politèc. de Catalunya, 2004.Hargadon, Bernard J. and Múnera Cárdenas, Armando. Cost accounting. Grupo Editorial Norma, 1996. Horngren, Charles T., Foster, George and Datar, Srikant M. Cost accounting: a managerial approach. Pearson Educación, 2007.Joya R., Juan S. Design of a cost system for the company Industrial de Accesorios Ltda. Universidad Industrial de Santander. Thesis, 2016 Ramírez M., Carlos V.,García BM and Pantoja A., CR, Fundamentals and cost techniques. Editorial Universidad Libre, Cartagena Headquarters, 2010. Reveles López, Ricardo. How to understand elementary costs without being an accountant. Instituto Mexicano de Contadores Públicos, AC, 2019 Sinisterra V., Gonzalo y Polanco I., Luis E. Administrative Accounting. ECOE EDICIONES, 2007.